Where's the Economy Headed: Soft Landing or Recession?

LIZ ANN SONDERS: I'm Liz Ann Sonders.

KATHY JONES: And I'm Kathy Jones.

LIZ ANN: And this is On Investing, an original podcast from Charles Schwab. Each week we analyze what's happening in the markets and discuss how it might affect your investments.

KATHY: Welcome back, Liz Ann. You were out sick for a little while last week. Are you feeling better today?

LIZ ANN: I am starting to feel human again. And unlike the frequency with which I get afflicted with this, bronchitis that sometimes turns into walking pneumonia, I didn't fully, fully lose my voice for an extended period of time. And I know you've been in that boat before. And we joked a while ago when we were both dealing with it, I have always said, you know, "doing my Brenda Vaccaro voice or my Suzanne Pleshette voice." And every time I say that or think that, I think, "Oh gosh, how am I dating myself?" Probably anyone younger is probably wondering who the heck those two women are.

KATHY: Well, they're great voices, but they're not your voice, unfortunately.

LIZ ANN: Well, I know you carried the Fed commentary part of last week, so you're the pro on that subject anyway, so thank you for stepping in and covering me when I was sick.

KATHY: Happy to do it. Well, let's kind of get down to it here. We're back and you're almost back. So what's on the agenda today?

LIZ ANN: You know, we published our outlook. We were first out of the blocks, the outlook that Kevin Gordon and I wrote, which was at the end of November. And as is typical these days, just the less than a month since then, pretty much a year has unfolded in the course of a few weeks, and it doesn't render the outlook outdated. It just, I think there was some activity in the market recently, particularly with the massive move up in small caps and the significant swing in performance for the S&P Equal Weight that had been part of our outlook that we expected better performance down the cap spectrum and that there was a lot of money itching to find opportunities outside of just the "magnificent seven." But admittedly, we may have borrowed some performance in the latter part of 2023.

And I know because of a call that we collectively did yesterday, you have some of those same sentiments with regard to what has happened in the world of yields.

KATHY: Oh, that's for sure. I mean, we are now where I thought we'd be in terms of long-term yields, where I thought we'd be in the middle of 2024. So with 10-year yields are under 4% in the Treasury market. And that was really kind of the forecast yield that we had for next year. And I really didn't think it would get there until about mid-year. We did expect the Fed would shift gears. They did a little faster and more aggressively, at least verbally, than anticipated.

So yeah, this drop in yields has come a lot faster than I anticipated. So obviously, to some extent, it's back to the drawing board to work up some new scenarios for 2024. I will say in the foreign bond markets and currencies, which our group also covers, a little less of a surprise. We had been anticipating yields would fall in most developed markets and in emerging markets as inflation started to slow and those central banks had room to start cutting rates, and that's playing out.

Similar story in the currency markets. We were looking for some pullback in the dollar once the Fed signaled it was ending rate hikes. But I do think still there's a limit to how far it can fall given the relative weakness and growth outside the United States. So all in all, it's been kind of a mixed bag on forecasting. But it has been a good year for investors.

So today, you've got Keith McCullough on the podcast. I think that's going to be a really interesting interview.

LIZ ANN: They always are with him. I've known Keith for a long time, and we did record the interview a couple of weeks ago. So that's just an FYI, although the content is still really interesting. He dives into his process in the very unique way he looks at economic cycles, and he's got some interesting ideas, too. Some out of the ordinary places where he sees opportunities. So that'll be an interesting part of the segment as well.

LIZ ANN: Well, I'm thrilled about this. Joining me now is Keith McCullough. I've known Keith for many, many years. He is the founder and CEO of Hedgeye Risk Management. And prior to founding Hedgeye, Keith worked as a hedge fund manager at the Carlisle Blue Wave Partners hedge fund, Magnetar Capital, Falcon Hedge Partners, and Dawson Herman Capital Management.

So back in 2014, Keith launched Hedgeye TV and since then has not looked back. He's also the author of the popular book Diary of a Hedge Fund Manager and founder of private equity firm Seven7.

In addition to producing a wide array of macro research covering the top 50 global economies, Keith also hosts his own show, The Macro Show weekday mornings, as well as The Call at Hedgeye, which features the firm's entire 40-plus analyst research team discussing their favorite long and short stock ideas. And Keith also hosts the acclaimed interview series Real Conversations, which features in-depth conversations with the world's top investors, strategists, and thinkers. I have done those with him, and they're always very interesting conversation. And the goal behind Hedgeye's investing research platform has always been to push the boundaries of financial research and provide data-driven, conflict-free, hedge-fund-quality research to all investors.

Keith holds an economics degree from Yale University, and this is cool, while at Yale, he led the men's ice hockey team to a Division I Ivy League Championship.

Maybe most important, Keith is a friend. I've known him for a really long time. I've always been, for years, in the hot seat, getting drilled with questions by Keith. So Keith, first of all, thanks for joining us, and thank you for switching seats with me on this very rare occasion.

KEITH MCCULLOUGH: Well, thank you, Liz Ann, and for putting me in the hot seat. This is good. This is—I like the role reversal here.

LIZ ANN: Good. All right, let's get started. So I mentioned in the intro there in your bio about the book you wrote, Diary of a Hedge Fund Manager—when was that written?

KEITH: That was back in, I think it was in 2010, so shortly after founding Hedgeye.

LIZ ANN: OK, so post–financial crisis.

KEITH: Yeah.

LIZ ANN: Yeah, so I want to start there. I'm sure our listeners know at least something about hedge funds, but for people who might not know all the details, just give us a rough overview of what a hedge fund is and maybe also your perspective on how the industry and the funds themselves have changed over the years.

KEITH: Yeah, they've changed dramatically. And as you noted, I worked at more than one hedge fund, and at a hedge fund that actually blew up, which was the hedge fund that Carlyle had started. So I have some experience on that risk management front, Liz Ann, in terms of what not to do. I wasn't the primary blow-up person, but it's changed dramatically really in the sense of how markets move. I mean, when I started almost a quarter century ago. It seems like it was not that long ago, but I'm dating myself. 

You know, the game within the game was that hedge funds were fundamental and could get edge and would have uncorrelated returns to the stock market, for example. I mean, that has changed dramatically, if anything. And we talk a lot about the investment landscape changing via share of ETFs, whether it be passive predominantly or ETFs in general, versus hedge funds assets under management. 

What's happened is that hedge fund returns, of course, have correlated more and more and more with what the market's actually doing. Leverage ratios have gone straight up, and really the flow of the machine or the flow of passive ETF products has really become the new game within the game. So I think you really, for me at least, I like to think that understanding both games really puts me in this "quantimental" type seat as opposed to just being, like, my pure fundamentalist self of just being a hedge-fund person.

LIZ ANN: "Quantimental," I don't know if I've heard you use that term. That's going to be one I rob—with attribution, not to worry. But I already wrote it down with my red pen. Talk to me a bit about Hedgeye, how you started it. And also you have a very unique approach to financial markets and have pretty consistently endeavored to level the playing field between everyday investors and Wall Street. And obviously as a card-carrying member of the Charles Schwab family, I and we also know something about everyday investors. We love disruptors' stories. So how has Hedgeye, as you put it, torn down the edifice of old Wall Street brick-by-brick? How did that become your sort of brainchild?

KEITH: Well, let's start with old Wall Street first. I mean, not that I'd ever be critical of Wall Street, right, Liz Ann, or the embedded conflicts of interest, the banking recommendations or anything like that, which any human being now that they have Chat GPT should be pretty well aware of. But, you know, again, old Wall Street, we affectionately call that because it still hasn't really changed. You know, when I thought of Hedgeye, I also thought of the opportunity embedded in the words "hedge fund." I mean, I think most people thought of that and maybe still do as kind of a Darth Vader type thing—you can't see inside of it, and it's evil maybe. You know? So the word "Hedgeye" was—if you could look inside of a world-class hedge fund risk management process, like we do all of global macro, every asset class, what would you see? 

And hence the word "hedge" with "eye" and you get "Hedgeye"—and maybe the only clever thing I've ever come up with. But I mean ultimately that's what I thought. And I thought like, look, wouldn't it be great to give "The People," you know, with capital T and a capital P on the people, an opportunity to learn the game within the game, learn what a real process looks like, see a transparent and accountable manager in my case—because essentially I'm like the, I'm the pretend hedge-fund manager because I don't run a hedge fund anymore for other people. I try to guide the people or coach them through the process so that they can empower themselves, teach them how to do it on their own, be self-directed in a way that Schwab would advocate and really believe that they can beat hedge funds and over time do so with something that is theirs, their own process.

So that's been enlightening for me inasmuch as I think a lot of other people, and I'm quite grateful for our audience, or what we call "Hedgeye Nation," because they teach me a lot about the game, because I think it's actually harder to coach the game than to play it. I could play it by myself behind my hedge fund screens all day long, and I still do, I run my own money. But to coach it, Liz Ann, that's been my daily challenge, and I quite like it. I like doing it. I like playing the game and coaching it out loud for the people.

LIZ ANN: And not just out loud, but very, very transparently. I was trying to think of a better way to ask this, given the different connotations, but you expose yourself in terms of your investments and positions and trading. So what's the "why" and the "how" of that?

KEITH: Well, I am exposed. So you know, when the tide rolls out, you'll know if I'm naked short, that is for sure. You know, I have shorts, I have longs. That's what I meant by that, of course.

But again, so we call it the timestamp. You know, #timestamp. Every single move I've ever made at Hedgeye has been timestamped for anyone to see. Every terrible mistake, every victory, everything in between.

And I do that for a lot of reasons. One, I want to show that I have skin in the game. And two, I want to make myself better, faster. And I didn't know that part was going to work that way. But with Twitter, YouTube, all these powerful social media tools—what happens, Liz Ann, is if I do something really dumb—like I'm dumb, right? I'm a former hockey player. I'm a dumb-dumb sometimes. So if I make a dumb mistake, I'm quickly corrected, and/or I get information that I would like to have. And that wouldn't have happened if I was in my former hedge fund seat behind a wall, right, where I couldn't communicate with the … you know, there's the tower and there's the people. And the people are going to let you know—the question is are you going to listen? And to me, that's really been helpful. And I think it's definitely the core of what we do. I mean, people quite like that I'm right and I'm wrong, and that they'll be right or wrong with me. I think that's kind of the deal.

LIZ ANN: You've mentioned risk management a few times. I liked one of your comments recently about how, and here I'll quote you, "People with money make more money by letting the money work without crazy assumptions and taking on crazy amounts of risk." But these days in the world of social media and Twitter, or X or whatever we're calling it, and you know other platforms like Reddit, there are so many loud and bombastic voices who are trying to gain attention or clicks with a lot of really simple—for lack of a better way to phrase it, just "get in, get out" type calls—when in fact, investing should be a disciplined process over time.

So that's kind of a lead-in to your unique disciplines, especially what you and I have spent a ton of time talking about over the years because it very much ties into the way I think about cycles and markets. But you put it in the context of what you call "quads." So dive into your approach to markets, and give our listeners a sense of how you think about it in terms of quads.

KEITH: Yeah, and what I'd say, you know, with the, to use your words, very good one, "bombastic nature of the days that we live, or these are the days of our lives." I mean, on the one hand, you have YOLO, right? You'll hear like ridiculous things—at least they're ridiculous to me. They'd sound ridiculous to you or to Charlie Munger, and rest in peace. I mean, "YOLO—only invest what you can lose." I mean, no, that's gambling. And then on the other hand, you have HODL, right? Which is a code word for "don't risk manage it, bag hold it." You know? If it goes down 60, 70%, you're saying there's a chance it's going to come back, and that's kind of like, ironically enough, but not really, that's been as old as Wall Street itself. Like to do such a thing. And what that really means is, "don't take your money out so I get paid my fees."

And so we don't do either of those things. We're not at either, you know, like buy and hold everything, YOLO, short-term face ripper, whatever you're going to do on Reddit. What we do is we risk manage what we call the full investing cycle. The full investing cycle, quite simply—you take a sine curve, everybody should know what a sine curve is—and if you could, you would buy the bottom of every cycle and you would sell the top of every cycle. Or at least you would risk manage and do different things at the top of the cycle. You might say, OK, we're at the top of the cycle for both interest rates and the economy. Interest rates are going to start to go down. I'm going to buy utilities inside the S&P 500®. I'm going to buy defenses. I'm going to buy something that isn't what works … and getting to the quads—and I'll try to keep this non-geeky and non-lengthy. But quads, we define that sine curve as having, think of it like the seasons or think of … there are four seasons. You in one part of your life lived in those four seasons. I know you like to go to the southern part.

LIZ ANN: Where there's only one season.

KEITH: Where there's only one season, but, you know, us people in the northeast or from Canada, in my case, we have the four seasons, right? So each quadrant has two factors, the rate of change of the economy or GDP growth and the rate of change, what everyone has an opinion on now, which is inflation. So the combination of those two things give you four different scenarios. Quad One and Quad Two is where growth is accelerating. Quad Two is when it's accelerating with inflation, where it gets really exciting—like 2021 was a Quad Two year. Quad Three is when, you know, that's where we are now—you have some stagflation. Inflation won't come down and it sticks, and growth starts to slow. And then Quad Four of course is the death knell where, you know, I do sound like an evildoer where or a hedge fund Sith Lord or whatever people want to call me.

With Quad Four, a lot of things, bad things, happen—you know recessions, depressions, crashes. You know, really not getting caught offside when you're entering one of those Quad Fours is the number one risk management exercise, and in as much as coming out of that, right? Like you want to be long growth when the recession's ending or maybe sometimes before then or during then. We'll have to see how this one works. We can get into that.

LIZ ANN: Well, where are we now? What quad are we in now?

KEITH: We're in Quad Three and unfortunately entering Quad Four. So we think that while the recession was delayed due to a variety of things, the biggest being government spending—I mean, if you want to delay a recession, then you just borrow your brains out and spend deficit levels that the world's never seen because the future doesn't matter, or the future of your kids or otherwise. I can get into that. That's not a political statement. It's just what happened. We had epic government spending. So this year the recession was delayed, but we have that starting quite literally, you know, through the holidays and into the first quarter and first half of 2024. You know, whether it's a deep or a shallow recession, I don't know. But that's where growth starts to slow at a faster pace from what are fairly elevated levels.

LIZ ANN: And another interesting comment of yours recently regarding recession was that "a recession is not a catalyst to buy stocks, and everybody feels like a winner after a month like November of 2023, just like they did after November 2007 and November 2021." So of course, I have to ask you to elaborate on that.

KEITH: Well, fortunately for me, amidst all my mistakes, those are two that I didn't make, which November of 2007—if you got YOLO along the Nasdaq or anything, really stocks, you didn't see the other side of the grass until Q1 of 2009. So that would have been a good spot to be paying attention. And November 2021, of course, was the mother of all … we call that one "MOAB, the mother of all bubble highs," OK? So that's when, you know, Bitcoin was at 68,000, the Russell 2000 was 25% higher, even the Nasdaq was 12% higher than where it is now, even though it's had a good year.

But, you know, these are very unique points in time because these are peaks, right? Just like, you know, any mountain pass, you're going to go back to the sine curve, if you could go back to the top, you would. Like in Q3 of 2007, GDP was close to 3%. In Q3 of 2021, you know, it was a very similar number. In Q3 of this year—what is it? The headline was 5%. Oh, great. Rainbows and puppy dogs, soft landings. I think they say no landings, which that's not what anybody in a plane ever looks for, but it's a Wall Street thing to say.

And again, I don't have a long track record of calling recessions every year. I'm not a perma-bear, just to be clear. It's just that I have been accurate at these cyclical turns, and I do think that that's where we're at right now. And even if I'm half right, you know, the risk management decisions that have already been started to have been made. I mean, if you really go back to November 2021, like I said, you know, if you're long small-cap stocks, you got to be up over 30% from there to get back to break even. 

And my goal for the people is to not have those kinds of crashes or drawdowns of their capital. This is their hard-earned capital, Liz Ann. I mean, these are the people. We're not talking to Wall Street here. Most retirees cannot afford, at this point, to lose a third of what they earn. So I always talk about, OK, with my Canadian accent, it's like, "You have worked your butt off, you know, to build your pile, your hard-earned capital. And that pile should be preserved and protected at all costs, especially when we get to these cyclical points." And that's where I think we're at. And that's what my process says. And again, it's a measuring and mapping process of the rates of change of the economy. Just like again, going back to the four seasons, just like you'd measure the probability rising of a hurricane or of the wind picking up or the rain coming or if it's stopping. These aren't random things. These are things that you yourself do as good as anybody in the world, a job daily of describing.

LIZ ANN: Oh, thank you very much. So given your view that recession could maybe even already be underway in the early days of it, and I don't disagree with that possibility. We've been using "rolling recessions" to describe this unique cycle, because we've had segments of the economy have their hard landings, but knowing how recessions are ultimately declared and dated by the powers that be at the NBER, I think you might be right. So does that align your thinking with what the market expectation has for the pivot to actual rate cuts by the Fed? So what is your thinking on how they will sort of key off data, being data-dependent, assuming inflation continues to come down and assuming the labor market starts to get hit? Are you in keeping with that potential of a March timeframe of starting the easing cycle?

KEITH: Yeah, I mean, if I'm right on that—you don't want me to be right on that if you're a bull, right? I mean, and that's the point on back to your prior question, like, be careful what you wish for.

I mean, so let's go back and do it one more time. Peak of the cycle November 2007—the Federal Reserve was cutting rates aggressively by 2008, and stocks went down faster because you'd entered a recession. You know, let's do it again. Let's go all the way back to 2001. Greenspan was cutting interest rates, and it got worse; it didn't get better. Because what happens at the very end of the cycle, of course, is to your point, you know, the labor cycle starts to deteriorate, which is exactly what we've seen in recent months is an explicit deterioration in the labor data. You know, when you look at all the economic cyclical or your indicators that Liz Ann Sonders looks at, you know that labor is the last of the Mohicans. It's the latest of late cycle indicators. So when it rolls, you are either entering a recession, or you're not going to have one.

Now again, I'm not rainbows-and-puppy-dog guy. I mean, if anything, if you're ever going to have a recession on Main Street that's already there, you could see it. It's already in manufacturing, it's in industrial, it's in China, it's in Europe. These are reported recessions. Like to your point, they've been rolling recessions, but the broadening of the recession into, "OK, we're going from full employment to your neighbor lost their job to you could lose yours." Of course, the difference then from recession is … and depression is your boss loses theirs.

But we're in that point where, again, just think about it functionally as opposed to the way that, or let's maybe talk more like Milton Friedman would talk about economics than some person, unelected person at the Fed or somebody on old wall TV telling you whatever they need to tell you. When you lose your job, you consume less, OK? When you expect to lose your job, your confidence falls and you start to consume less. And this is exactly what we're seeing right now. And the dynamics of this recession, Liz Ann, I think are very different than '08. I think '08 was a Wall Street-leveraged disaster—lying, you know, sneaking, whatever we want to call it. Dick Fuld thing—you may remember Lehman Brothers, Dick Fuld was their CEO. And we got that right. But, you know, unfortunately we got that right. But this is, I think, a very much a mainstream thing. If you look at all the data that we look at, which looks at everyone who's not on Wall Street, which is most people who are hopefully listening to this, you know that at least two-thirds of the country doesn't have any money left. They don't have savings. They don't have a cushion. They've seen the aggregate inflation of things—17% to 20% over the last three years—not be this great disinflation. So you know, that's why you see the angst. You see the societal mood, if you will.

So just to get that all to, "OK, what if we're right, and the Fed is cutting rates?" Well, one, bond yields are collapsing like they always do into a recession. So is oil. Oil is now down like 25% from where it was in the third quarter, where we weren't in a recession, and that wasn't our call in the third quarter. So things are collapsing that do collapse into a recession. They did into the end of 2008. Oil did, and bond yields did. And then, of course, the begging for the cowbell for the Fed rate cut, that's what Wall Street wants. So you get a one-month lift in the stock market, maybe one and a half months, just like, again, in '07, November of '07. The last month that stocks went up was in November.

And then all of a sudden you have to deal with reality. Companies have to come out with their budgets, so do homes, real people. And you have to figure out how you're going to live in a recessionary time. And hopefully it's only three to six months, Liz Ann. I don't think …

LIZ ANN: Right, I was going to say, I don't think you're looking for, even though you've used the November '07 comp a lot, I don't think you're looking for an environment like that, which followed November of '07, where the bottom literally falls out of the entire global financial system.

KEITH: No. I mean, no, like I said, I think it's worse already on Main Street. It's a different thing for Dick Fuld to lose his job. I don't feel bad for him at all. I don't think anybody does. And for a large and growing population of people that are already struggling financially to lose their one or two, or in some cases, three jobs. I think that this is a very different thing. It's never the same, but it's more analogous to the 1970s than it would be 2008, where you just can't get rid of inflation. And again, it's for the people on Main Street more so than '08 was a Wall Street thing.

LIZ ANN: You know, you mentioned the folks that have a second job, or god forbid, a third job, and I think that's been one of the most interesting characteristics of this cycle on the employment side of things—are more than abnormal divergences in data, whether it's the differential between the Household Survey of Employment from which the unemployment rate is calculated and the Establishment Survey from which payrolls are calculated—and the fact that what can be picked up in the Household Survey are those multiple job holders. And it's part of what is necessary, really, at any point in the cycle, but I think at perspective turning points, is peeling at least a layer of the onion back and digging into the details—whether it's Household Survey versus Establishment Survey or initial unemployment claims versus continuing unemployment claims.

And then another one that's getting more attention that I know you've spoken or written about is GDP versus GDI. And when I first started talking about it, I thought, "Is this kind of too wonky and people aren't going to understand?" But I'm increasingly getting questions from the general public about this. So what are your thoughts? And I guess which metric is telling the truer story right now?

KEITH: Well I think anytime government metrics start to diverge like they've never done before—actually to be clear, if you look at late, like to your point, when you separate the Household Survey versus the Establishment Survey, you look at the difference between GDP and GDI—you're seeing these divergences, i.e., one goes red light, one goes green light, the opposite way, like you've never seen before other than during the great financial crisis.

And that's the one similarity that I would say exists is that … so for example, something that everybody knows because on Friday everybody's got to guess, you know, my dog can guess what the nonfarm payroll is going to be, and he'll be closer than me most of the time. That nonfarm payroll number that everyone gets hyped up about at the end of every month has been revised down eight out of the last nine months. Well, that's odd, but not really. You know, the government states that jobs are good, and then they have to restate when you're not looking that they were lower. Meanwhile, you're on Main Street, I'm like, "I knew that number was going to be lower, but why isn't it … et cetera, et cetera."

So that's what creates divergences, reality versus fake news on reported numbers. And that does not portend these divergences between national income or gross national product or gross domestic product. These things don't, when they diverge, they don't portend to anything other than bad things. Because eventually the things that haven't caught up catch up—it's called mean reversion, right? So they go down then all at the same time. And that's what the labor data has been doing. I mean, I think again, getting back to whether we're going to be right or wrong, or you can handicap yourself, the probability of a recession rising or falling has to involve that last part, which is when does labor catch up to everything that's already … you know, we already have a recession in CapEx, we can go down the line. We already have a recession in an entire generation. I mean, just look at some of the statistics on the percentage of Millennials or Homelanders or Gen Z that have to live with their parents because they don't have any money to pay to live anywhere else. I mean, we have big, big problems that the more you peel back the onion, to use your words, the more scared you get.

LIZ ANN: All right, now I want to get to probably where a lot of our listeners want to get, which is market stuff. So let me start with a broad question. Then I want to dive into … some of our conversation here has been a little doomy, a little gloomy. But no matter what the environment, there are always opportunities. But let's start with another big topic over the past year so, which is market concentration. And at least until the past month or so, a heavy bias in performance by this so-called Magnificent Seven. So what are your thoughts on that concentration, its roots, and risks associated with it?

KEITH: I mean, it's just finally on the tape. And again, like whether they're divergences, big word, red light, green light, you can play Squid Games too, right? I mean, economic data, or it being what is the market? Like what is the market? I mean, the Russell 2000 is a lot of stocks. It's more than a thousand stocks. It's not 2000 stocks. Well, that's down, like I said, 25% from where the economic cycle peaked. The S&P 500 is down 5. The NASDAQ's down 12.

Well, what if you took the top 10 stocks that are in the S&P 500 and called it equal weight S&P 500, closer to 500 stocks? That looks more like the Russell 2000. It's not done much, right? Whereas gold, even if you're using year-to-date—I use cycle-to-date, where the bull market cycle in gold started—gold, for year-to-date, is up 12, but from a cycle-to-date, perspective is up more like 20%.

So these cycles are what they are, and it really matters that people are crowding into these—we call them the MM7, the magnificently manipulated seven stocks. Because they do get manipulated, because that's where the liquidity is. And people that don't get that are kind of like the sucker at the table in poker. I mean, if you don't know who the MM7 is or who's driving it, then tag, you're it. And that's just the problem.

Even yesterday, not to use it one day as example, but the S&P 500 yesterday was down 0.1%. OK. So the CNBCs of the world, "Hey, it's not that bad." But ten stocks—ten stocks were up, making sure that happens, whereas 409 stocks in the S&P 500 were down on the day. I mean, so there's a raging bear market in small caps, mid caps, real estate, regional banks—obviously sectors, six out of 11 sectors, I think are down as you know.

So it's getting narrower and narrower, and we call it the Titanic. It's very typical. It was more like 1999, where it gets really narrow at the tippy tippy top when the other things are sinking. And the other things that are sinking, like just to finish this off using a global-equity perspective, which is critical—China is a disaster. I mean, this thing goes down every day, and it's not a small place. So we have a lot of things that are different this time, and market caps embedded therein that the world's never seen before on expectations—like Apple's guided to zero growth for the fourth quarter, but the stock never goes down. Well, why? Because the machine flows into it until it doesn't. And the last point on that is that the machine flows as 401(k) flows are flowing. So if you start to see people lose their jobs, guess what the flow does? It slows down. So that's a problem, I think, pending as well.

LIZ ANN: Yeah, I think it's always an important reminder when you have a concentration in performance that it can work in both directions. And it's incredible how short memories are given that 2022's bear market was marked by those same stocks that were all of the performance for most of 2023 got hurt much more than the overall indexes. And so it works in both ways.

Now, as you and I are taping this here, we're I guess about five weeks into what has been some broadening out—Russell 2000, S&P Equal Weight doing better than the cap-weighted S&P over a four- or five-week period of time. Do you think that that's just a blip, a little bit of sort of exhaustion in terms of buying up the cap spectrum? Or do you think that there is investing capital out there that would like to try to find opportunities outside of that very small concentrated and arguably very expensive group of stocks?

KEITH: One, I'd call it a bear market bounce, a big one. So I think what's happening there too is there's some performance chasing. You could tell me, but it's at least 85% of active managers can't beat the index this year. So they're looking for ways to chase that just like they did in November of '07. Remember our Novembers—November of '07 and 2021. They're very similar. These are very vertical kind of like levels that a lot of people got sucked in. So I think that that's also a big thing. If you're just a chart monkey looking at momentum of charts, and you can quite literally be blinded by what's coming from an economic cycle, or in this case, a recession's perspective. So no, I wouldn't chase it. I'd stay with what we got. A lot of things that we own are actually hitting all-time highs, which is ironic. 

LIZ ANN: Yeah, so where are you finding opportunities? What are your favorite areas? Expose yourself here, Keith, with what you do like, because we try to end on a slightly more positive note.

KEITH: Well, in this case, usually I'd be getting killed. I mean, I don't know. I guess I got lucky. But the three big things that we've owned that have done the best are India, the stock market—again, third largest economy in the world. It's not inconsequential. But if you open your eyes, you can see these things. Gold, which I've already mentioned, it's a pretty big thing, pretty big asset class. Does really well when bond yields start to collapse and crash and you're heading into a recession. Always has.

And by the way, we're not permanently bullish on gold. We got long it in November of 2022, exposed. And that was, the chart didn't look good there, Liz Ann, no, no. You wouldn't buy that on the chart at $1,700 gold.

And then uranium and nuclear of all things. And this again, we think for a lot of different reasons, there's a big deep supply gaps and holes, but there's also massive geopolitical risks out there. And unless you're in Kazakhstan or Russia to go dig up some more uranium, you're not going to get it anytime soon. 

So those three things. I mean, in U.S. stocks, we've been long on insurance stocks. Those have been our favorite. Those are also hitting all-time highs. MLPs,^[1] you know, again, a lot of rate sensitivity there, Liz Ann. So like if you're betting on a recession, the real super-secret sauce is to bet that down bond yields does well for certain stocks that like it when bond yields go down. That's the simple one. And gold is the ragingly bullish obvious example of that.

LIZ ANN: This has been awesome. Thank you for sitting in the hot seat. And I enjoy it. I know our listeners are going to enjoy it. When I'm out on the road and I'm getting peppered constantly with questions, and this is right up their alley. So thank you for sharing your wisdom and your humor and your unique approach. We really appreciate it.

KEITH: Well thanks for giving me some airtime and exposing me, Liz Ann. I appreciate it.

KATHY: That was great, Liz Ann. He definitely has some interesting perspectives. So the stock market will be closed on Christmas Day and New Year's Day, but otherwise what do you think investors should be looking at over the next couple of weeks?

LIZ ANN: Well, yeah, a lot of the data releases will quiet down. We don't have major inflation reports or a job report coming out. So I think hopefully we could also take a little bit of a break. But particularly next week, we've got a lot of the regional Fed data. And as you know, there are often, either components of each of those, some of the comments within. You can often find really interesting nuggets that both provide that regional perspective on what's going on, but you can sometimes sort of cobble them together into some interesting stories at the more national level. And given the recent improvement we've seen in some metrics around housing, we're going to be getting next week home prices and sales, also mortgage applications. So you know, in your world, with yields having come down significantly, I think some of that housing-related data should be of note to see whether we're moving the needle courtesy of the move down in yields. And then, you know, there's always the weekly unemployment claims. And I think that continues to be an important weekly piece of information, not just initial claims, but continuing claims. How about you?

KATHY: Yeah, same data we'll be tracking, but it should be … well, I always say it should be a quiet week, and then it turns out not to be a quiet week. Something happens. But we are looking forward to January, getting some of the updated labor-market numbers the first week in January. And then looking forward to when Congress returns in January. 

LIZ ANN: Really?

KATHY: Well, we know from our colleague Mike Townsend that there's a lot going on in January. And I'm sure he'll cover that on his podcast, WashingtonWise. But I am curious to see whether we're going to have a shutdown in January or February. So I'm hoping to get through the last week of the year peacefully and then gear up for the early January onslaught of news.

LIZ ANN: Maybe one of these days we'll be able to shut down the constant talk of a government shutdown, but maybe that's asking too much.

KATHY: Afraid so.

LIZ ANN: So that's it for us in 2023. Thanks for listening. We'll be back, as Kathy said, with new episodes in early January. We wish everybody very happy holidays. And if you've enjoyed our podcast so far, it really does help if you go on Apple Podcasts and leave us a rating or a review.

KATHY: You can always keep up with both of us on Twitter or X or LinkedIn. Check out our research and articles also on Schwab.com/Learn. We hope you have a wonderful holiday season. Liz Ann, we hope you're feeling 100% in January when we're back. 

LIZ ANN: Yeah, me too.

For important disclosures, see the show notes or visit Schwab.com/OnInvesting, where you can also find the transcript.

[1] https://www.schwab.com/stocks/understand-stocks/mlps