Old Fears Linger, New Fears Emerge for the Markets

MIKE TOWNSEND: The 118the Congress is underway, and, wow, what a start. The routine process of electing the speaker of the House became a four-day drama that took 15 votes before California Republican Kevin McCarthy finally became speaker in the wee hours of the morning on January 7. But what does it say about the prospects for the new Congress to be able to work together and pass laws when the first and most basic step of organizing, electing a speaker, takes more votes than any Congress since 1859? Meanwhile, when it comes to the markets, investors are definitely looking to put 2022 behind them. The S&P 500^® wrapped up the year down more than 19%. That performance, coupled with bonds having their worst year ever and the cryptocurrency meltdown, meant that investors didn't have much success no matter where they turned. So can Congress and the markets get their act together for 2023?

Happy New Year and welcome back to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.

On today's episode, I want to look at the signals that the markets are sending as 2023 gets underway. We've got a tough housing market, a surprisingly resilient jobs market, an important earnings season that's about to start, and the Fed taking its foot off the gas pedal, at least a bit, while promising rates will continue to rise. In just a few minutes, Schwab's Kevin Gordon joins me to discuss how investors should be processing all of this information. But, first, a quick look at what's making news here in Washington.

On Capitol Hill, we've got a split Congress after two years of Democrats controlling both chambers. In the Senate, Democrats hold a 51-49 majority, with all three of the chamber's independent senators caucusing with the Democrats, including Senator Kyrsten Sinema of Arizona, who announced last month that she would leave the Democratic Party and become an Independent.

In the House of Representatives, Republicans begin the year with a 222 to 212 majority, with one vacancy that will be filled by special election next month. But their majority has had something of a rocky opening act, as the marathon effort to elect Speaker McCarthy dominated the political talk over the first week of the year.

What is particularly notable and worrisome about last week's circus is that it was not your usual political standoff between Republicans and Democrats. This was a bitter squabble within the Republican Party, Republicans fighting with Republicans. It revealed the deep divisions within the party and underscored how a relative few can wield enormous power when the margin of their majority is so small. It's going to make getting basic legislation through the House potentially very difficult.

In the House of Representatives, the party in the majority controls just about everything, and if its members stick together, they can pass just about anything. It's the keeping its members together that could be tricky for the Republicans in 2023, at least if last week was any indication. But it's also important to remember that the Senate, which is narrowly controlled by Democrats, will have to sign off on anything that passes the House in order to make a law. And right now, it's hard to see how the House and the Senate will be able to agree on anything.

So why does any of this matter to investors? Because there are two things that Congress will have to do this year that could directly impact the markets. One is the annual government funding legislation. With the agreement late last month to fund government operations for the rest of the current fiscal year, which runs through September 30, Congress removed the threat of a government shutdown early in 2023. But that shutdown possibility looms in the fall once the current agreement expires, and a protracted government shutdown is unlikely to be a plus for the markets.

Even more worrisome is that 2023 will also see a debt ceiling fight, and uncertainty about when and whether Congress will increase the debt ceiling is perhaps the policy issue that scares the markets more than any other. The U.S. has never gone into default, but it has come close. And it came closest in the summer of 2011, when Congress came within days of defaulting. Market volatility spiked; Standard & Poor's downgraded the U.S. credit rating for the first time ever. And what was the political configuration during the 2011 crisis? The exact one we have now, a Democrat in the White House, Democrats controlling the Senate, Republicans holding the majority in the House. Already, the two parties are drawing their lines in the sand. Republicans say they will only raise the debt ceiling if it is paired with a similar amount of spending cuts. Democrats are saying they won't negotiate on the debt ceiling and that cuts are out of the question. With one party controlling the House, the other controlling the Senate, the prospects for a meeting of the minds seem dim at the moment. Fortunately, we have a few months until this drama hits the front burner, but there's real worry on Wall Street that this may be the most difficult debt ceiling battle ever.

Not surprisingly, a split Congress like the one we have now is a recipe for gridlock, and this Congress seems a candidate to take that to a whole other level. But when Congress grinds to a halt, that's often when the real policy developments in Washington come from the regulatory agencies. And that's what we have shaping up in 2023.

Two agencies, in particular, that investors should be watching are the IRS and the SEC. The IRS will be putting in place a number of rules related to last year's Inflation Reduction Act, including the mechanics for implementing two new corporate tax increases that were passed as a part of that law. One is the new 15% minimum tax for corporations, and the second is the new 1% tax on stock buybacks. The IRS put out initial guidance for both during the last week of December, but more details are expected early this year.

And the IRS is working on the details for the electric vehicle tax credit. Late last month, the IRS put out an initial list of the vehicles that will be eligible for the $7,500 credit, but the list is certain to change in the coming months when the Biden administration implements the Inflation Reduction Act's requirements that electric vehicle batteries need to be sourced from the United States or one of its trading partners. Because most of the minerals used in electric vehicle batteries are sourced from China or Russia, few vehicles are expected to make the eligibility list. This creates an odd window right now for buying an electric vehicle because electric cars and SUVs that qualify for the tax credit now may not do so after the updated list is put out in March or April.

The other agency to watch is the SEC, which is tasked with regulating the markets. It expects to finalize controversial rules in the coming months to require public companies to disclose more to investors about the risks they face from climate change, as well as give more transparency for investors into private funds.

But what may really matter for investors is a set of four proposals the SEC made just before the holidays to overhaul the way the equity markets work. Together, they run nearly 1,700 pages, and they represent the most significant attempt to reform the markets since 2005. Among numerous other provisions, the proposal would reduce tick sizes for some stocks, allowing them to be traded in tenths of a penny increments rather than pennies. It would give investors more information about the quality of the execution of their orders so that they could see where and why their trade went to a particular venue. And perhaps most controversially, their proposal would require smaller orders from retail investors to be sent to a new auction system that would be run in fractions of a second.

The proposals are dense and complicated, and most of the industry is in the initial stages of sorting out exactly what they will mean for investors. A public comment period is open until March 31, after which the SEC will have to review those comments and decide whether to move forward. I'll be examining these potential changes to the markets and their impact on investors more closely in a future episode of WashingtonWise.

Finally, an important update from the previous Congress, which now seems like months ago. But when President Biden signed the massive government funding bill into law on December 29, he also made significant changes to retirement savings law. The Secure Act 2.0 was included in the package, and it includes more than 80 provisions to encourage Americans to save more for retirement. The final bill was the product of months of bipartisan negotiations to meld three different retirement bills into one. While the vast majority of the provisions will go into effect a year or more down the road, there are two notable changes that are now law of the land.

First, the age at which individuals must begin taking required minimum distributions has gone up from 72 to 73. Anyone who turns 72 on or after January 1 of 2023 can now let their savings grow for an additional year before they must start taking distributions. But if you turned 72 last year, then you must begin taking your RMDs in 2023.

Second, the penalty for missing your required minimum distribution or for failing to take enough has been reduced from 50% of the shortfall to 25%. And if you repay the difference within two years, the penalty decreases further to 10%. That's not to say you should ever skip your required minimum distribution, but it does ease the pain for the forgetful.

On my Deeper Dive section, I want to take a closer look at the state of the market as we begin 2023. How is the market processing the messages that the Fed is sending about inflation and interest rates? How long will pain continue for the housing market? What can we expect from the next round of corporate earnings? To help me explore these and other questions, I'm pleased to welcome back to the podcast Kevin Gordon, senior investment strategist here at Schwab. Kevin, thanks so much for joining me today.

KEVIN GORDON: Great to be back, Mike. Thanks so much.

MIKE: Well, Kevin, let's start with the Fed, which has begun to slow the pace of rate hikes. But at the last meeting, a number of Fed voters seemed to indicate that not only will the hikes continue, but they may not stop at the 5% level as they had initially planned. In the early part of the fall, the market was acting like the rate hikes were basically coming to an end. When the Fed said that wouldn't be the case, we ended the year on another big downturn. So has the market been getting it wrong all along?

KEVIN: Yeah, so the December meeting already feels like so long ago, mostly because we've had a bunch of Fed members out on the speaking circuit in the past week. But to address the first part of your question, there's always been a good chunk of the market looking for rate cuts. And, in fact, if you look at fed funds futures pricing, there's still an expectation for cuts later this year. That is very much not the case in the eyes of the Fed. And whether you're listening to Fed speakers or reading through their forecasts, most members are still keen on raising rates from where we're at right now, then keeping rates elevated to ensure that inflation stays on its downward trajectory. And the Fed's own latest Summary of Economic Projections, or the SEP, which was updated in December, showed the fed funds rate moving up from the end of 2022 through the end of 2023. That is directly at odds with the market's expectation right now.

And this battle between what the market wanted and what the Fed desired was pretty much the theme for the entirety of last year. And one of the ways you can look at that is by analyzing financial conditions and how much they tightened or eased during the year. So for anyone who is not as familiar, when we talk about financial conditions, we're generally looking at an aggregate measure of the stock market, the U.S. dollar, Treasury yields, credit spreads, and the fed funds rate. So when those metrics are worsening—so, for example, stocks are declining, yields are rising—it means that conditions are tightening, and vice versa. So one of the Fed's main goals has been to engineer tighter financial conditions, which in their eyes would hopefully restrict activity and then slow the economy.

So in directional terms, that's certainly what happened in 2022, because we saw one of the most aggressive financial conditions tightening cycles in history. But the dynamic throughout the year was such that conditions would loosen at times, which posed a challenge to the Fed, and basically forced officials to be more aggressive or hawkish, thus causing conditions to tighten again.

So one of the clearest examples of this was back from mid-June through mid-August when we had a 17% rally in the stock market, which was mostly predicated on what I thought was a confusing, bullish notion that the Fed was about to pivot imminently to rate cuts. That narrative never really made sense to us for a couple of reasons. First, the only scenario in which the Fed would be forced to pivot right to rate cuts would be if the economy and/or the labor market were under severe duress. If there was some kind of financial or economic crisis forcing the Fed to do that, it would hardly be a good thing for risk assets. And second, I think it was pretty strange for anyone to assume that the Fed would halt rate hikes when inflation was still climbing by 8% year-over-year. So, sure, the CPI peaked last June, but that's hardly a green light for the Fed just to stop hiking rates, let alone start cutting them. And not only that, but members of the FOMC have made it clear that they also need to see a material rolling over in wage growth and a loosening of the labor market. So far, we don't have any indication of an increase in labor market slack.

So whether you're looking at the unemployment rate, average hourly earnings growth, or job openings, I don't think that the Fed, as of now, can declare any victory on the labor market front.

MIKE: Yeah, Kevin, it's so interesting that there has been this kind of pockets of the market that have anticipated that we're going to suddenly switch to rate cuts, when that's just not at all what the Fed has been saying throughout this last several months. So I guess the question is do you think the market is finally getting better aligned with the Fed's message at this point?

KEVIN: I think we've started to see a notable shift in market dynamics lately. And this isn't calendar-specific; it's more based on where we're at in this cycle, but 2022 is very much a year in which market narratives were dominated by inflation. I think that the spotlight will shift more to the labor market in 2023. And that's not to say that inflation doesn't and won't matter, but now that the trends for inflation are turning quite favorable, I think attention will shift more to how much softening we see in labor.

And one of the reasons I think that's the case is because of the recent relationship between the stock and bond markets. So if you look back to 2022, every time we had a bear market rally in stocks and then reversed lower, the declines coincided with Treasury yields—specifically, in this case, the 10-year yield—making new highs.

So at the time you and I are having this discussion, the S&P 500 has declined since the end of November, but the 10-year Treasury yield is still down from its peak reached in October. So there's still a negative correlation between stock prices and bond yields, which means that on most days we're seeing both stock and bond prices fall together. That's typically the case when you have an economy that's dealing with an inflation problem. And we know that because for most of the 1960s through the 1990s, that was the dynamic.

But back to my point a second ago, I think it's notable that the 10-year yield has not climbed back above its high, even as stocks have weakened. That's one way the market's telling me that inflation is no longer front and center. And it wouldn't be the case if the 10-year continued to spike and take out its prior high, but now that it increasingly looks like we've seen the peak in yields for this current cycle, there will be a point at which the downturn in both yields and stock prices will be a darker signal for the economy. But I just think that if we don't get a huge move higher in yields, you'll probably get to an environment, eventually, in which the market reacts more to labor data and less to inflation data. That's largely because, as I mentioned, it seems that only a sliver of labor market indicators are in line with the Fed's goals right now. And what the market wants is weaker labor data, which is why you're starting to see sharper moves to the upside when we see things like a spike in jobless claims or indications of softer wage growth.

But I would just caution investors against cheering for a significant weakness in the labor market, because if you have companies that are being forced to lay off workers because demand is falling rapidly, and then profit margins are coming under pressure, that's not necessarily bullish for the economy or the market. And I get the notion of looking through that to see brighter days for the economy ahead, but we also have to recognize that this is a unique cycle. So it isn't a clear-cut case that we will just automatically rebound after a few months of job destruction.

MIKE: Well, if the jobs market is one of the key factors to watch, another is the housing market, which is a key economic indicator that I know you pay close attention to. And there's no way to sugar coat it—the housing market has fallen off a cliff. Sometimes I think we tend to think of this data just from the perspective of the home buyer. You know, it's harder now to buy a home because interest rates are higher, but there are so many other downstream impacts: job losses in the housing industry, falling prices for those who need to sell, and all of the tangential industries that are tied to home sales—appliances, furniture, landscaping, moving companies. So how do you see all of this playing out? Does it just go on and on until rates come down?

KEVIN: Yeah, so I love looking at the housing market because it has such a strong tie to the broader economy and has a great record as a leading indicator. Across the whole spectrum right now, virtually every housing indicator is flashing a recession warning. I like to think of housing in three different buckets. You've got sentiment, and then sales or activity, and then price. And as you mentioned, the market has fallen off a cliff. It's probably no surprise that all three of these buckets are giving us worrisome signals for the broader economy.

And if we start with sentiment, which is a leading indicator for overall housing itself, we've seen a total collapse on both the buyer and producer sides. And the weakness really started within buying sentiment, which was dented during the pandemic because of how out-of-control home prices got. Then with the spike in mortgage rates and the rise in input costs, builders' sentiment started to tank, as well. And that's actually still in free fall right now. So if you look at an index that we track for this, which is the NAHB Home Builders Market Index, it's just barely above where it was in April 2020. But the decline over the past year is actually the worst that we've seen in the history of that data. And I like to single out home builder sentiment, in particular, because it has a strong reputation as one of the key leading economic indicators. And it's not the only one that investors should look at, but it's crucial in signaling turning points for the stock market and the economy.

And if we move on to sales and activity, that second component, data have gotten pretty ugly lately. So home sales have collapsed at double-digit rates over the past year, but pending home sales, in particular, which lead overall sales, have fallen by nearly 39% over the past year. That's the worst decline in history, and it's actually worse than in the housing collapse in 2008.

And the last domino I think we should look at is falling home prices. And this is where you get into a larger debate among economists and investors, because there are many on the bullish side who argue that we don't necessarily need to see a large-scale collapse in home prices this time, because individuals aren't being forced out of their homes, not to mention the fact that the affordability crisis is mostly hitting those who are looking to enter the housing market. And I mostly agree with that, because if you look at where the true crisis is right now, it's for those who want to purchase homes but just can't because of still high prices, or the spike in mortgage rates, or inflation taking longer to come down.

The other aspect worth noting is that job growth has still been relatively strong. So even though average monthly job creation has been slowing, the fact that we haven't seen an outright decline means that people still have income, and, in turn, they're able to pay their bills even if it's gotten a little bit more expensive. Once you take that income away, individuals start to become forced sellers of things, and homes can easily top the list, since shelter is a large component of overall expenses.

But I think that for right now, the jump that we've seen in mortgage rates, you know, it makes sense that people are much less willing to sell their home. Going from a 3% mortgage to a 7% mortgage is impossible for a lot of people.

MIKE: Well, so is there anything to feel good about as you dig into the housing numbers?

KEVIN: Yeah, so I pointed out a lot of worrisome developments within housing, but I'm a bit more optimistic based on the fact that we're probably not facing a similar scenario like the subprime bubble in the mid-2000s. So compared to that period, we haven't seen egregious lending practices, household balance sheets have actually strengthened, and the supply backdrop for housing is entirely different. So one of the main issues with the housing market in that run-up to the financial crisis was that you had both demand and supply expanding rapidly in tandem. Today, and even before the pandemic, we still face a supply-constrained environment. So the bad news is that it'll still take some time for the market to balance itself out, but the good news is that if prices go down further from here, the potential to bring down the economy is less powerful than it was in the mid-2000s.

And another upside that I'll point out is that the rolling over in home price growth bodes well for rental prices, which, in turn, bodes well for inflation overall, because shelter has such a large weight in an index like CPI or PCE. And the link just really has to do with the cyclicality of housing. So if you think about rents following home prices, they tend to go together. But the caveat is that the average lag between home and rental prices is quite long. So it's 12 to 18 months, depending on which cycle you're looking at. And at the very least, we're getting signals that rental inflation will start to cool at some point this year.

But what I think will be increasingly important to watch is how much affordability comes down. If the Fed sticks to its word and keeps rates elevated, home buyers won't be getting much of a cushion from a decline in mortgage rates. Plus, the Fed wants to see softer wage growth. So that leaves us with home prices having to fall further in order to bring affordability back into line.

And I know that it probably seems counterintuitive, but you would almost wish for more weakness in housing sooner rather than later, because that would help bring prices down faster, and it would certainly help the Fed check that inflationary box in terms of shelter costs. And I'm not wishing a bunch of pain on the sector, but as I've been saying for a while now, we have to pay attention to what the Fed wants and does, not necessarily to what investors want.

MIKE: Well, Kevin, let's switch gears to earnings because you and Liz Ann Sonders have been sharing that you expect earnings to decline in 2023, and we're headed into the first earnings season here this month. So give us some background on why you see earnings declining, and, also, how big an impact this could have on the markets.

KEVIN: I'll back up a bit, a year ago from now, when virtually to no one's knowledge at the time, we were entering the bear market. So if I came from the future and told you that we would see a bear market in stocks exacerbated by one of the most aggressive Fed tightening cycles in history, a logical thought of anyone's would probably be that we'd see a massive hit to earnings. Now, with the benefit of hindsight, we know that isn't what happened, given the entire bear market in 2022 was driven by the collapse in valuations. So even though forward earnings estimates are off their peak from the middle of 2022, they still moved up throughout the year. That at least indicates to us that the decline thus far has been driven by interest rate and inflation pressure, which is really no surprise given what the Fed has done to the fed funds rate. Given that deterioration in the market and leading economic indicators, it's just tough for us to see how earnings make it out unscathed and without a deeper contraction. And we did indeed have some weak earnings growth last year, but we think there's still a pretty large disconnect between the direction of the economy and what analysts are expecting.

So if you just look at some indicators like the ISM Manufacturing PMI, the Leading Economic Index from the Conference Board, or CEO Confidence, none of them are consistent with earnings staying elevated at their current level. And not only that, but we still think we're going to see more deterioration in goods-oriented parts of the economy and within companies that benefited from the surge in inflation. So the benefit with a huge increase in prices was that companies were able to boost revenues. Now that's working in reverse, and with profit margins starting to compress, pricing power is fading quickly for businesses that were able to ride that pandemic wave.

The other concern that we have is inflation is taking longer to roll over in the services sector. So you certainly have disinflation in the pipeline, but if the Fed thinks that prices are taking too long to ease, then there's a chance that rates either go a bit higher than originally expected, or at least they just stay higher for longer than expected. Either way, I think it poses a risk to the services part of the economy, especially because wage growth for that sector is still quite strong.

And this is very much in keeping with our theme of how attention is shifting for markets in the economy. I think that the emphasis in 2022 on inflation and valuation compression is largely behind us. It will likely start to shift towards employment and earnings. The downside is that means pain is likely not over for stocks, but the upside is that we're at least moving into the next phase of the bear market, and, in turn, you're getting relatively closer to the end of it.

MIKE: Well, I think we would all be in favor of getting to the end of this one.

I want to turn to another point I've heard you make recently, and that's that the days of a few mega stocks being responsible for most of the markets' gains are over. So could you flesh this out a bit? Why, and what are the implications of this for investors? Maybe, most importantly, does this mean there are opportunities out there for some less familiar names?

KEVIN: The simple and short answer is that investors in the market are clearly starting to leave mega cap stocks behind. And if you look at the largest names in the S&P 500—we sometimes refer to them as the Big Five or the Super Seven—they've all seen massive declines in both absolute and relative terms. And I think it's a pretty simple theme to understand, given most of these companies were pandemic havens.

So even if you just consider the four largest members in the S&P 500—Apple, Amazon, Alphabet, also called Google, and Microsoft—it's clear as to why those names were responsible for both the market's rebound in 2020, and then the gains into 2021, because during the pandemic, we were essentially forced to live in the ecosystem that consisted of those names. We were forced to conduct work through our devices, and we were essentially only buying goods.

Now that dynamic has gone into reverse because the global economy is clearly putting the pandemic in the past. And this has been the story for a while now, but consumers are shifting to services instead of goods. They're shifting from pandemic names to reopening names. And, unfortunately, for these large companies that benefited from a world under lockdown, pricing power simply isn't there anymore. Plus, the environment in which we find ourselves is much different today than right before and during the depths of the pandemic. We still have an inflation problem, which has caused the Fed to embark on an extremely aggressive monetary policy tightening campaign. And given that delt a blow to large-cap growth stocks, it's fairly clear to see why these huge names are underperforming.

And that leads to one of our broader themes for this year, which is the return of the average stock. And by average, I mean those that are overlooked and relatively smaller, so just not part of that mega cap space. And it's not necessarily a play on sectors either, so favoring energy over tech, for example. But there are ample opportunities outside of what has worked well for the past few years. And it feels like a long time that the largest members have been responsible for most of the broader market gains, but we just don't see that as the case moving forward for the reasons that I've just outlined.

Plus, the market is starting to tell you that this is the case. So if you just look at something like the equal-weighted S&P 500 and its outperformance relative to the cap-weighted S&P 500, it outperformed that index by 6.3% in 2022. That may not be the most compelling stat, but consider the fact that it was the largest spread in favor of equal weight since 2010. Plus, that came two years after the cap-weighted index outperformed by the widest margin since 1999.

So moving forward, I think one way to put this into action is to employ a strategy Liz Ann and I have been touting for quite some time now. If you just look at companies with strong earnings profiles, so those that have healthy trailing and forward profit margins, lots of cash on the balance sheet, a high earnings yield, then you can find segments of the market that will perform well in the face of both continued monetary tightening and then a slowing economy. And the beauty of doing that is it doesn't confine you to certain sectors or certain names. Some of those mega cap companies may, in fact, have strong profit margins, but there are other small cap names that do, as well. If you look at this from a factor perspective, not just a market cap or sector perspective, that can be really beneficial right now.

MIKE: Well, you're talking about how to build a portfolio in these times. And let me ask you about one of the tried-and-true ways to build a portfolio, which is the 60-40 stock-bond portfolio. It fell by 24% in 2022. And I think for multiple generations of investors, it's almost like a bedrock principle. So is the 60-40 split over, or is it that the idea of some rule regarding the balance to a portfolio is, itself, no longer relevant? Should investors be thinking differently about how they construct a portfolio given all this uncertainty?

KEVIN: I'll answer your questions with a series of questions. What kind of investor are you? Do you have a high risk tolerance? Are you greatly in touch with your emotional intelligence, meaning can you understand, use, and manage your emotions? These are some of the questions I always ask somebody whenever they ask about specifics regarding asset allocation, because I don't think that we can assume every investor has a 60-40 portfolio.

And there are many reasons for this, but one of them I always cite is how hated the bond market has been for so long. So prior to the inflationary episode in which we still find ourselves, all you heard from many investors was that bonds weren't offering much at all given incredibly low yields. I don't have any insight into the specifics of everyone's portfolio, but if people shunned bonds because of low yields and devoted more of their cash to equities, then that would theoretically bring up the 60 portion of someone's portfolio.

Even if we just look at equities, my question would be what kind of equity investor you are? Have you been bullish on growth stocks in big tech, thus raising your tech exposure over time? If so, the equity portion of your portfolio would have disproportionate growth. Over the past decade, the tech sector's weight in the S&P 500 has grown from 19% to 25%. And, yes, that 25% is still after the huge drawdown that we saw last year. Conversely, the opposite has happened with a sector like energy, which has seen its weight in the S&P 500 fall from 12% to 5% over the past decade.

I think the 60-40 question should always be thought of as a question of risk and emotional tolerance. How much are you, the investor, willing to stomach wild swings in stock prices, especially if you're investing in high-flying names? And how much comfort will you take in something that's traditionally considered a haven, something like U.S. Treasuries? Ultimately, I think the biggest mistake would be to tie risk tolerance and age together. Just because you're young doesn't mean you need to load up on stocks. Just because you're near retirement doesn't mean bonds are the only investment that makes sense. It really just comes down to what your needs are.

MIKE: Well, that's a great reminder, Kevin, and a great way to end this conversation. I think it's always important for us all to remember that no two investors are alike, and that the only rules that matter in investing are the ones that work best for your particular situation.

So thanks so much for joining me and talking to be today, Kevin.

KEVIN: My pleasure. Thanks so much, Mike.

MIKE: That's Kevin Gordon, Schwab's senior investment strategist. Kevin works closely with Liz Ann Sonders, and you can always find their commentary on schwab.com/learn.

Well, that's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks. Take a moment now to follow the show in your listening app so you won't miss an episode. And if you like what you've heard, leave us a rating or a review. That really helps new listeners discover the show. For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.

I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.