There’s a lot driving the economy and markets right now, and on September 22 we had the chance to sit down with Kevin Gordon and talk through it over coffee.
Kevin is Head of Macro Research and Strategy at the Schwab Center for Financial Research. You may have seen him on CNBC, Bloomberg TV, or Yahoo Finance, or read his work in The Wall Street Journal and the Financial Times. It was his first trip to Alaska. He was only on the ground for about 20 hours, and he told the room it was a nice change to see mountains that aren’t office towers.
I had the pleasure of moderating the conversation. We covered the Fed’s recent rate hike, interest rates, consumer spending, the stock market, and diversification. What stood out to me most is how well Kevin’s view of the data lines up with what our own investment team has been seeing. Here are a few highlights I wanted to share with you.
The Fed is dressing for the weather
The Fed raised rates because inflation is still running above its 2% target, and the job market is sturdy enough to handle a little tightening.
Kevin pointed to three forces keeping prices elevated:
- Tariffs. The pressure has come in waves rather than all at once, most recently with Canada.
- The AI build-out. Spending on data centers and the equipment inside them is running hot, and so are the prices tied to it.
- Energy. Oil and diesel prices have moved higher again with the conflict with Iran.
To explain the Fed’s position, he borrowed a Midwestern proverb that Chicago Fed President Austan Goolsbee likes to use:
“There’s no such thing as bad weather. There is such a thing as bad clothing.”
The Fed can’t control supply shocks, wars, or trade policy. Raising rates won’t fix any of them. What it can control is its response, and its mandate from Congress is to fight inflation. Kevin’s advice was to skip the debate over whether the Fed is right and focus on how it is likely to act.
This is not 2022 all over again
Kevin was clear that today’s hiking cycle looks very different from 2022, for two reasons.
The Fed is early this time. In 2022, it waited until inflation hit 7% to 8% before acting, and it has since admitted that was a mistake. This time it is acting much earlier.
The labor market is in the opposite spot. Coming out of the pandemic, reopening sparked a hiring boom and a classic wage-price spiral. Today hiring is rebounding, but wages haven’t kept pace. That’s good news for inflation, even if it’s less welcome for the average worker’s paycheck.
A 5% 10-year Treasury may just be normal
Kevin sees today’s 10-year Treasury yields as a reasonable resting place, not a warning sign. They only feel high if your investing memory starts after 2008.
His case rests on two pieces:
- Nominal growth is strong. Before adjusting for inflation, the economy is growing at a pace we haven’t seen since the early 2000s.
- Inflation has been stickier. Supply shocks keep coming: the pandemic, Russia and Ukraine, Liberation Day tariffs, and now Iran.
We saw similar yields in the 1990s and early 2000s, when growth looked a lot like it does today. For investors, higher yields also mean more income from the bond side of a portfolio.
For stocks, Kevin said the speed of a rate move matters more than the level. Sharp jumps in yields tend to be harder for markets to digest than steady, gradual changes.
Americans spend when they’re happy and when they’re sad
Consumer spending, which makes up approximately 70% of the economy, continues to hold up even as prices have risen faster than paychecks.
Two things have helped. Households have been dipping into savings, and rising stock prices have created a wealth effect. Stocks now make up a record share of household financial assets, based on Federal Reserve data going back to the 1950s.
Sentiment surveys say people feel pessimistic about the economy. Their wallets say otherwise. Kevin shared a line from an industry peer that got a laugh from the room:
“Americans love to spend when they’re depressed and happy.”
He also made a point I found refreshingly practical. Most people don’t inflation-adjust their paychecks. They get paid, cover the necessities, and decide what to do with what’s left. As long as that paycheck keeps showing up, spending tends to follow.
“You can’t really crack the economy until you crack the labor market.”
The biggest companies aren’t always the best performers
One of Kevin’s most useful points: people tend to assume the largest companies are also the top performers, and that hasn’t been true for the past year and a half.
Apple is the best performer among the “Magnificent Seven” this year. Yet more than 150 companies in the S&P 500 have done better. Leadership is spreading beyond the AI giants, and other forces are driving returns too.
Energy is the clearest example. The S&P 500 energy sector has been the top-performing sector this year, ahead of tech. It’s a good reminder of why diversification matters, and energy has acted as a natural balance to the AI trade.
The same idea applies beyond U.S. borders. A great example is Europe, which is included in developed international allocations through the MSCI EAFE Index. European markets lean more toward financials, health care, and manufacturing, which can help balance a portfolio in years like 2022, when a handful of large U.S. tech names weighed on the broader market.
From the audience
Some of the best moments of the morning came from our guests’ questions:
- Are these mixed signals normal? Kevin called them unique to this cycle. Services, which are less cyclical than manufacturing, have kept the economy steady, and the job market has held up. Many traditional indicators just haven’t told the full story this time.
- What changed from Chair Powell to Chair Warsh? Less than it first seemed. Warsh started out avoiding forward guidance until “the only adult in the room, which is the bond market” pushed back. He is now giving guidance, just more quietly. The bigger changes may be internal, including possibly fewer Fed meetings starting in 2027.
- I’m retiring soon. How do I protect my purchasing power? Kevin was quick to say the answer really depends on your unique circumstances, and there isn’t a one-size-fits-all approach. One thing worth knowing is that higher rates tend to reward savers, since cash and bonds are generating more income. The right mix for you is a great conversation to have with your advisor.
- How fast do energy prices show up in inflation? Some prices react within weeks. Others, like airfares, can take several months or longer.
- Will AI create jobs? Kevin’s answer was a bit of a paradox. A true productivity boom means the economy grows faster than the workforce. If AI creates lots of jobs, you get less productivity and more inflation. It’s hard to have it both ways, and the productivity boost hasn’t shown up in the data yet.
- What about private markets? Kevin’s rule for anything private: know what you own, and understand the liquidity and time horizon before you commit.
Kevin’s one piece of advice
I closed by asking Kevin for the single thing he’d tell investors today. His answer: revisit what diversification means for you.
After a strong run in U.S. markets, a portfolio can drift. The areas that did well grow larger, and you can end up more exposed to a handful of names or sectors than you meant to be. It may not call for a change. But it’s always worth checking.
My takeaway
What I appreciated most was Kevin’s measured, data-first approach to headlines that can often feel overwhelming or conflicting. At any given time, there can be several signals telling you different things. Inflation, interest rates, and the job market don’t always move the way you’d expect, and some of it can feel counterintuitive.
That’s exactly why it’s important to have a process for evaluating data and making decisions. Reacting to any one number rarely serves you well. Looking at the full picture helps you see the forest, not just the trees. That’s the approach our investment team takes every day, and it was reassuring to hear Kevin’s read on the data line up so closely with ours.
If you’d like to talk through what any of this means for your own plan, reach out to your advisor. We’re always glad to have that conversation.
Thank you to Kevin for making the trip north, and to everyone who joined us and brought such thoughtful questions.
Kirsten Halpin, CFA®, CAIA®, FRM®
Chief Investment Officer, Partner
The opinions expressed and the account of the guest speaker’s remarks are those of the author as of the publication date. Mr. Gordon and Charles Schwab & Co., Inc. are not affiliated with Alaska Wealth Advisors. This material is for informational purposes only and does not constitute legal, tax, or individualized investment advice, nor a recommendation to buy or sell any security. Forward-looking statements are not guarantees of future performance, and actual results may differ materially. Alaska Wealth Advisors is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training.
