Concentration Risk Meets Diversification Reality

LIZ ANN SONDERS: I'm Liz Ann Sonders.

COLLIN MARTIN: And I'm Collin Martin

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

COLLIN: Well, hi Liz Ann, we're back again. Last week, we focused a lot on the Fed. Understandably, there was a lot going on with last week's meeting, but now we can get back into some other issues that are making headlines. So let's go back to something that we've been talking about a lot, for better or for worse, is the conflict in the Middle East, the war with Iran. Are you getting questions about the energy sector? Obviously, lot of movements there with the price of oil. Have you gotten questions about that or really what's driving returns in the broad market?

LIZ ANN: I'm still getting a lot of questions about the Iran war and oil prices. Interestingly, I don't get a lot of questions about the energy sector specifically, and that that may suggest there's an opportunity here. We know it's a relatively small share of the S&P 500©. It's under-owned both institutionally and among individual investors and could have whipsaws, as we've seen in the last couple of months with swings in oil prices.

We don't, right now, have a wildly favorable view on the energy sector, but when I think long term, I think it could be an ongoing interesting story there, especially for such an under-owned sector, but certainly still get the questions about, not just oil prices and the impact on the market—it is the case that we're largely displaying an inverse relationship between oil prices and the stock market—but not to the degree that we saw in the month of March, call it the first month of the aftermath of the onset of the war in Iran. And we've had days, as you certainly know, where oil prices have moved higher and the equity market still has fairly strong performance.

But I do get more questions now on if and when this is going to have broader implications for the economy or questions around why hasn't this had broader impact on the economy yet. So that's what I have been addressing to a significant degree. And I'd say there's several reasons why it hasn't had a meaningful impact yet. One is just simply the lag effect. Changes in oil prices tend to work their way into the economy over a span of time, not at a moment in time. And there tends, somewhat obviously, to be a lag between the initial spike in energy prices, oil or gasoline, and the broader impact on the economy.

We're less of an energy intensive economy right now. We are a net-energy exporter, although we are a net crude-oil importer. I think that sometimes gets lost in translation. And I always like to remind investors, too, that regardless of maybe us not being at the mercy of supply disruptions like other parts of the world, oil is still priced in the global market. We don't sell the oil we produce in the United States at a discount to our own domestic users. So we're still at the mercy of prices.

But I'd say probably most important and helps to explain the overall strength in the market recently, is we've also seen a shift in attention toward earnings season back to AI, back to the mega-cap tech areas and the massive amounts of capex spend and the fact that if there's one sector that has really dominated in terms of positive revisions to earnings growth, not just for the first quarter, which is what we're in the midst of reporting right now, but the full calendar year of 2026, it has been the tech and communications sectors. That's where the real strength in earnings.

The last thing I'd say, though, on that, and I think this is important to point out, especially from our group that has written about and spoken a lot about in the last several years about the concentration within the market in terms of performance among the mega caps, there's also concentration in earnings, as well. In fact, the latest data that I saw, which is now a few days old, so it might not be exactly accurate, but close enough, is just three companies alone, just Alphabet, Amazon, and Meta, explain about 70%, in dollar terms, of the increased earnings expectation for calendar year 2026.

So it's not just a stock market that has been in the past highly concentrated, but even the earnings story has a concentration angle to it. So what about you, Collin? What's top of mind in your fixed income world?

COLLIN: You know, it still is, you know, the price of oil is a big driver there. But I want go back to something you mentioned about that concentration. And when I hear things like that, sometimes I'm happy to be a fixed income strategist, because I think that's so … that's got to be such a challenge. You know, if you're … let's say you're a portfolio manager with equities, and you have this concentration of companies that have, I'd say, done pretty well over time. There's a, you know, there's a risk to not owning them. There's a risk to owning them, in case it reverses. And I don't envy people who are in those positions. So I digressed a little bit.

What's driving the bond markets lately? You mentioned the relationship between the price of oil and energy stocks. We're seeing that a lot with the Treasury market where the price of oil, the fluctuations we're seeing there, and that kind of ebbs and flows with good or bad news we're getting from the Middle East, that's driving to a degree the direction of the 10-year Treasury yield, at least directionally. It's not a one-for-one move or anything like that, but on days where oil prices rise, you tend to see higher 10-year Treasury yields, based on expected higher inflation down the road. And then the opposite tends to be true when you see oil prices come down. You tend to see long-term yields come down as well.

There's a lot of uncertainty right now, but despite that, the market has been really well behaved. And I say the market, I'm really talking about the Treasury market, specifically more of those long-term yields like the 10-year Treasury yield. It's held in really tight range for about eight weeks now. It's been really between 4.2% or so and call it 4.45% or so. So roughly 25 basis points for nearly two months. And I've gotten some questions from people like, "Hey, why is that happening? Shouldn't they be moving higher? Why are they so tight?"

But at the end of the day, there's a lot of things that drive Treasury yields. But one thing that I'm focusing on right now is the idea that the Fed is likely on hold for a little bit. We've talked about the Fed ad nauseum, obviously, but the Fed's on hold for a while. And if the economy is growing, which it has been, then you should see a positively sloped yield curve, and you get that. You see a 10-year Treasury yield offering anywhere from 75 to 100 basis points relative to the fed funds rate right now. That's indicative of a healthy economy.

And if we look at all the things that can move Treasury yields higher or lower, whether it's inflation expectations, fiscal concerns, the direction of global bond yields, we're kind of at a point right now that I think represents the economic environment we're in. Fed funds rate holding steady, relatively. I won't call it a strong economic outlook, but at trend we'll say 2% or so. And I think that's why we see yields where they are. I do think there's probably more upside than downside, mainly due to potential inflationary concerns, the longer that this conflict goes on. And also maybe with other developed markets. While the Fed's probably on hold for a little bit, other central banks are more likely to hike, like the Bank of England, the European Central Bank. So that might put somewhat of a floor for long-term Treasury yields and maybe actually pull them a little bit higher.

We're not expecting them to go significantly higher from here. We don't really expect them to retest the 5% level we saw with the 10-year back in 2023. But it could be possible, but we wouldn't see them, we don't expect to see them going much higher than that. On the idea of, I mentioned global bonds, we're seeing some movements, Liz Ann, in the dollar lately. And I was just looking, it looks like the dollar is close to the, call it two months lows or so. It's kind of back to where we started before the conflict began. Does that have any influence or impact on the equity outlook or general markets outlook?

LIZ ANN: Well, the moves in the dollar tend to be inversely correlated to moves in commodity prices and in particular oil, because oil is generally priced in dollars in the global market. But that relationship has broken down at times. There have been, you know, kind of micro periods, particularly since the onset of the war, where you've seen either both move down together or both move higher together. I don't know if that's a permanent break, but it may also reflect that there is more trading of commodities and other currencies aside from just oil.

In terms of the impact more broadly, because the … because S&P 500 companies derive between 40% and 45% of earnings from overseas sources, all else equal, a weaker dollar is to the benefit of those earnings. And that's why over the long term, you tend to see an inverse correlation between moves in the dollar and S&P earnings, because that index is a bit more global in nature. You don't see that to the same degree, say, in an index like the Russell 2000, because those stocks tend to be of companies that are more domestically focused. So that's how I think about the dollar and its impact on the market.

COLLIN: Yeah, we consider the direction of the dollar as well with global bond investments. We know it's an area that tends to be under-invested in with a lot of individual investors here in the U.S. And coming into the year, we thought that the dollar might continue to gradually decline. And that would be a boost, if you hold local currency-denominated bond investments at lower dollar. You can see currency appreciation in those local currencies.

And then after the conflict began, we kind of changed our outlook a little bit where we saw the dollar pick up a little bit because when there's growth concerns, people tend to go to the dollar for safety. I think that kind of clouded our outlook a little bit also, but also interest rate differentials play a big role. And coming into the year, we thought that a lot of other central banks would probably hold steady while the Fed was cutting, and that shrinking interest rate differential might result in a weaker dollar, also. But again, we kind of walked that back a little bit after the conflict began. If we were to get some more good news on the conflict, maybe there is room for the dollar to decline a little bit more from here, especially based on the kind of diverging central bank outlook. So I'm not changing our view right now. It's probably going to trade kind of range bound. Maybe there'll be ups and downs, but we don't see it having a noticeable direction over the short run. But if we were to expect it to resume its decline that generally would be a good thing for global bond investments, denominated in local currencies.

LIZ ANN: So Collin, you sat down with our guests this week, so tell us about her.

COLLIN: Yeah, great conversation. Our guest this week is our colleague Inga Rachwald. She is a director and senior investment portfolio strategist supporting Schwab Asset Management, which is the world that we live in, Liz Ann. Inga's focus is on multi-asset investment strategies, including income, model portfolios, and target date solutions across the equity and fixed income spectrum.

Prior to joining Schwab, she spent six years at RS Investments as a senior product manager and product specialist responsible for RS Investments' suite of actively managed fundamental and quantitative equity strategies.

So hi, Inga. Thank you so much for joining us.

INGA: Yeah, thanks for having me.

COLLIN: I think it'd be good to start kind of at the basics. When I talk with a lot of our Schwab clients, I talk about portfolio construction. And I think a lot of investors sometimes struggle with that. "Where do we even begin?" And I understand that it can be a daunting process. So let's take that theme and let's get back to basics and start with diversification. And I'll just give you a very open-ended question. Why do we diversify?

INGA: Yeah, I think with any concept like this, it sort of helps us to go back and see, "Where did this idea come from? Why did this become sort of the mainstay of modern portfolio management, wealth management?" And really, in its simplest form, diversification is this theory around not putting all your eggs in one basket, right? The goal at the simplest form is to find essentially the most optimal mix of assets to achieve the highest return, but also minimizing risk in that process. And you do this by combining different assets that don't behave like one another.

And so what made this so innovative, particularly for its time, frankly—this concept is roughly 75 years old—really, the research that it's sort of based upon. And it really stood the test of the time because previous theories really focused solely on return. How do you achieve the highest return? Didn't really take into account risk. And so that's what makes this modern concept of diversification so critical. And again, why it's withstood so many decades of different market environments, different regimes, is because it also looks at that risk, maximizing that portfolio return for the risk you want to take.

COLLIN: I love that because, in a perfect world, you'd probably want everything to go up in value, right? "Let's just get the highest return." But I think it rarely works that way. And you want things that move in opposite directions or at least maybe don't move together. Now, when we think about diversification, kind of have theory, and then you have practice. And it doesn't always work the same way. So how should we think about that?

INGA: Yeah, it's interesting. I was at an investment conference a few years ago, and there was a panel of finance professors alongside industry portfolio managers, so the practitioners. And I can tell you by the end of the panel, you could cut that tension with a knife. And I think it just really underlies how potent that sometimes that disagreement can be between those who study these concepts and those who actually do them in practice.

And so it's fair to have that critique and that back and forth. It typically makes the practice stronger. And I think some of the critiques are simply that some of these theoretical concepts that diversification is based on fail to account for real life scenarios, for example, what we call tail risk, which are simply extreme market events, which as we all know can happen. They maybe don't also think about investor behavior. There's assumptions that investors all behave rationally and markets behave rationally. We've come to know that's not the case. There's also differing views on how all of these different asset classes are going to perform. So there's a lot of variables that can really poke some holes into some of these theories.

But I think the good news is, over time, those two, the academics and the practitioners, have met in the middle and found ways to address some of those challenges to actually come up with some positive solutions. So thinking about, for example, new ways of estimating expected asset class returns. We now have some new processes where it takes more of the current market environment into account, different portfolio managers' views of the market, things like that. So it's still all predicated on the same concept of maximizing return for a unit of risk, but it takes into account some of the more real-life realities that maybe earlier versions did not.

COLLIN: Yeah, that makes a lot of sense. You've mentioned the terms "return" and "risk" a lot. I think that's really important because there really are two things to consider when you are building a portfolio: how much diversification you want and how much risk you're willing to take. You know, over time, riskier investments, if we talk about, let's say, stocks versus bonds, for example, stocks tend to generate higher returns over time, key word there, but they tend to be a little bit more volatile, tend to have larger price fluctuations. You need to be able to kind of balance that out.

Now, we're talking about diversification here and portfolio construction, but what about, let's call it over-diversification? Is that something, how about this—is that a thing? I'm throwing it out there. Is that a thing, and how should people think about that?

INGA: Yeah, it is absolutely a thing, and it can be a bad thing, certainly. And actually much more common, I think, than people realize. I even think back on my own past. I lived in San Francisco in the early 2000s. I moved across several jobs. And I think at one point I had like three 401(k) plans, multiple investments within them. And yes, I mean, there can be this issue, frankly, of over-diversification, where you essentially own so many things, whether it's funds or stocks or bonds or other things, where you can kind of dilute your returns. So if we go back to this concept of maximizing return for the level of risk, you might actually be diluting that return. And so it really does behoove us to look across our portfolios.

There are ways to adjust for that, certainly working with an advisor, for example, and kind of combining all of these things, streamlining them. But you can really discover some interesting things when you over-diversify, you might even actually have unintended concentration in a particular sector, for example, or you may just be paying too much for a number of funds that maybe altogether resemble an index, so there's definitely a challenge of over-diversification to think about on the opposite end of the spectrum.

COLLIN: Yeah, I think it's a good thing to think about when you are building your portfolio and working with a financial consultant, a wealth advisor, to make sure that you're doing the right things to reach your goals.

Now, we're going to stick on the topic of diversification here, Inga. I think over the … maybe in recent years, it's gotten a bad rap, arguably you could probably say there's always questions about it and, you know, does it work? Does it not work? There's also been concerns about diversification recently, say, in the stock market, where we've had this concentrated market where just a few stocks have been driving a large portion of performance. So if we think about that, does that mean that diversification, if we're thinking about a bond index, does that mean that diversification doesn't work?

INGA: Yeah, I live in the Bay Area, so I probably get an earful about all of the concentration in the equity markets as it relates to some of the technology names and consumer names that have just been driving so much of broad U.S. index performance in recent years. And I love this quote, you know, that comparison is the thief of joy. I think we've … you know, particularly because we've had such high levels of concentration, particularly in the equity markets, over the last several years, as an industry we've started inadvertently benchmarking these diversified portfolios, which we know their goal is not to outperform a small subset of the market, but we've inadvertently started benchmarking them to things like, whether it's one asset class, like U.S. large-cap equity, essentially we're benchmarking to whatever the best performing area of the market is.

And so it sort of takes away from what the core goal of diversification is, which is to not necessarily be the highest-performing portfolio, but on the flip side, not be the lowest-performing portfolio. And so these are some of those concepts which I think have gotten a little bit blurred in recent years due to concentration.

And look, I think it behooves us to remind ourselves just how different performance of some of those stocks like the Magnificent 7, right, the Teslas, the Amazons of the world have been. I mean, you have years like 2023, where the Magnificent 7 returned over 75%, and the S&P 500 returned around 26%. So you know, while less extreme in subsequent years, you still had some big differences in performance. And so I think some of that is what really sparked this comparison of long-term diversified portfolios to some of those smaller segments of the market.

COLLIN: You know, I'm a bond guy, obviously, Inga. So but I know all, you know, when you talk about those returns, they're eye popping. I want to … let's dig into that a little bit. When you saw this huge performance of, you know, a small number of stocks and a huge outperformance relative to the S&P 500, you know, I feel like it's logical to then want to own that sort of strategy, you know, for lack of a better term.

INGA: Sure.

COLLIN: What should we tell clients there?

INGA: You know, when we talk about diversification, it's certainly not meant to say, "Hey, if you like some of those big tech names. …" For example, we all know AI has done very well, sort of that artificial intelligence type investing. And it's certainly, again, not to say you can't invest in those. I mean, the good news is you can own those in a diversified portfolio. I think the message is, "Look, if you want to own those and own those maybe in a larger percentage because you believe that artificial intelligence and some of those beneficiaries are great, that's all fine and well." I think it just … make sure, whether that's sitting down with an advisor or doing your own analysis, make sure that it fits your risk profile.

We talk so much about the return of these names, but we don't talk about the risk. If you think about even looking at 2022, for example, the S&P 500 was down 18%, but the Magnificent 7 was down 40%. So these concentrated names, they can be great. They can be growth-oriented. But remember, concentrated positions can also be susceptible to sharp downturns as well. So it's really about balancing it out. Maybe you own some of those concentrated positions, but make sure that there's some diversification around those positions.

COLLIN: I want to go back to something you said before. I want to make sure I heard it right because I really like the quote. Did you say that "Comparison is the thief of happiness?" Is that what it was?

INGA: Joy. Same concept.

COLLIN: Thief of joy. And no, I really like that. I think I'm going to write that down, and I'm going to pivot again and talk about how this relates to bonds, but then throw it back to you. But we get that a lot. So if we look at equity performance over the past few years, it's been really, really strong.

And as someone who works in fixed income strategy, I'm talking about the benefits of a lot of fixed income investments that offer yields of 4%, 5%, something like that. And a logical question is, "Well, I've been getting 20% or more in stocks. Why should I even be considering that?" And you mentioned before, what are we comparing it to? Are we comparing it to the right things? What's the risk-return profile? So I want to kind of frame that and then toss it to you about the idea of a diversified portfolio, but frame it with goals and how goals play a role in that.

INGA: Yeah, this concept that we've been talking about of maximizing return for a level of risk, it focuses on risk. At the core, it puts investors into a different risk profile and then essentially says, "Here's sort of the optimal portfolio based upon how much risk you want to take." There's this emerging idea of goals-based investing, which still plays on a lot of the same themes, of course, diversification being the big one, but it kind of reframes it to say, "Hey, let's look at your portfolio. Let's build your portfolio to address specific goals."

So let's take a couple of examples. Let's say I want to buy a house in two years, but at the same time, I certainly … I want to have a retirement portfolio in 20 years, and you know, maybe college tuition in 10 years. So what it does is it attaches a portfolio to a specific goal and a goal that has a timeframe attached to it. So for example, a more near-term goal—let's say it's buy a house in two years—those investments are likely to be more liquid because obviously you'll need them sooner, perhaps more conservative because again, you'll need them, you know, in a shorter timeframe, you know, versus something farther out. Let's say retirement is farther out, and so there's more risk you can take on in the portfolio.

And so it just reframes the idea of what a diversified portfolio looks like and then asks you to then compare it to the goal. Are you achieving that goal? How are you tracking toward that goal, versus are you beating a benchmark? How are you doing relative to the Magnificent 7, and those sorts of things.

What's interesting about it, too, is that it also addresses some of the behavioral biases that we often see in the markets. And as we know, when market extremes happen, and investors maybe pull out their money at the wrong time or things like that, it helps to stay, again, focused on the long-term goal. In spite of what the market is doing today, up or down, how are we tracking toward the goal? So it is sort of an emerging area that's interesting as far as reframing the diversified portfolio. So the diversified portfolio is still at the core. It's just the goal is shifting a little bit.

COLLIN: All right, so on the idea of a diversified portfolio, let's say we're looking to construct one right now. Are there any do's and don'ts that we should be considering when we're looking to construct that portfolio?

INGA: Yeah, I mean, I think benchmark is probably the one I, sort of in my interface with clients, that I get a question about the most often. I think it's important to think about what you're measuring your portfolios against. And you know, that's where I think goals-based investing, you know, measuring it towards how you're progressing toward the goal is really important. You know, some of the pitfalls and I, you know, I think a lot of this really bleeds into the bond space as well is, you know, for example, when we saw yields rising quickly on bonds, we saw a lot of investors do what we call yield chasing, looking at maybe some of the higher yielding areas of the bond market, combining those with stocks, thinking, "OK, I've got stocks and bonds. I'm diversified."

Well, as you know, a lot of times, especially those high-yield corporate bonds can behave more similarly to equities than they do to other types of bonds. And so those are some of the sort of inadvertent things that can happen. You know, the other thing I would say, too, is just being aware of the impact of emotion on the portfolio. You know, that can be working with an advisor on a long-term plan, you know, sticking with it in spite of market volatility.

There are products out there that do the diversification for you and all of the rebalancing. So those sorts of things can also help take out some of the emotion behind it. But investor emotion is definitely a big one to keep an eye out on.

COLLIN: I think it's easier said than done to take emotion out of investing. We say that a lot. I feel like everyone says they're a long-term investor until the time comes where all of a sudden they want to sell because they're worried about the outlook. But let's talk about that a little bit because emotions are a huge part of investing. And I get it. It's hard to separate that. So how does emotion or investor behavior play into all of this?

INGA: Oh, it plays a huge role, and I think it's why there's this whole emerging area of academia around this study of behavioral finance and just how much investor behavior impacts markets, impacts portfolios, portfolio decisions. You know, some of the more common ones are, you know, not surprisingly things like loss aversion. You know, if you go through an extreme market downturn, and you see that sometimes catastrophic decline in a portfolio. And then you see signs that it's happening again in the market, of course, you're going to panic and think, "Oh, maybe I need to sell everything." That's one of the more common ones.

But on the flip side, there are biases like overconfidence or herding, where you're in a group of friends, and you all think this one stock is a great idea, and everyone buys it. And you sort of filter out, you know, some of the naysayers on it. So there's a lot here. I think what's even interesting is not just some of the sort of cognitive or emotional-type biases, but even generational biases.

There's a lot of interesting research on, you know, what generation you're in can really impact your views on investing. And that's not really surprising. You know, we all had different experiences with finances, with the markets when we were growing up. And between that and many factors, it can really impact how we view the market. So needless to say, lot of different types of biases that exist. And again, there's a whole body of research on this topic.

But really, some of the ways to address it, I'll say a couple of things. I mean, first of all, if you're working with an advisor, absolutely develop a long-term plan and talk actively about a plan if the market goes down, if the market goes up, are we going to trim, are there ways to maybe control the controllable? So maybe it's some of the portfolio fund costs or things like that. But there's a number of things you can do to just make sure you have that long-term plan in place. And yes, maybe some adjustments along the way if certain things happen in the market. But being cautious not to sort of sell at the wrong time and things like that is really important.

COLLIN: Speaking of behavioral finance, if you are interested in learning more, there's a new episode of Choiceology that is out, and it talks about decision-making, biases, and other topics within behavioral finance. So we will include a link to that in the show notes.

Inga, I want to wrap it up with one question. I think this one's a really exciting one because when we talk about diversification and portfolio construction, at its most simple form, you can look at stocks, can look at bonds, there's a cash allocation. There's other asset classes in there, but that's kind of a simple way. There's always more and more things that we as investors can consider. And even today, there's new and more esoteric asset classes like cryptocurrencies or alternative investments. How do they play into portfolio diversification?

INGA: Yeah, we've gotten so many questions lately from clients on some of these, you know, where we would call sort of non-traditional asset classes. You know, most of the research over the years has been done on traditional stocks and bonds and how they behave in portfolios. And then, you know, now you have these areas like cryptocurrencies and alternatives. And I would say a couple of things.

It's interesting, I think, first of all, looking at the correlation. So how they differ in their behavior relative to some of the traditional stocks and bonds you might find in a diversified portfolio. They do both offer generally very different types of returns. And so they do meet that kind of checklist for diversification as far as having that lower correlation relative to other asset classes.

However, there's a lot more to think about when it comes to those areas. So let's take cryptocurrency as sort of the first example. I think one of the challenges with it is we just have so much … such limited data really on cryptocurrencies and history-wise. And one of the challenges, too, is that our traditional ways of valuing stocks or bonds, again, more traditional, doesn't work with cryptocurrency. And so it becomes a little bit more difficult to try to find that optimal level of cryptocurrency in a portfolio given the amount of risk that it brings. And so in short, cryptocurrency can be very much of an investor's personal decision. It's highly sensitive to some of those assumptions of expected return that the investor has, and really ultimately realizing that it really can add quite a substantial bit of risk to the portfolio. For some investors, they can take on that risk. It's really just being aware of what it is relative to the personal goals that you have in your portfolio.

Alternatives, a little bit different, have certainly a little bit more history behind them, although still a lot to think about when it comes to adding alternatives. You have issues around liquidity, for example, right? Not easy to sort of get in and out of positions the way it is in sort of like a traditional mutual fund, for example. Less transparency, you know, they're not subject to a lot of the same, you know, sort of reporting and regulatory components that, you know, again, some of the traditional funds are. And so, in short, it's not a good or bad conclusion, it's just, I would say, for each of these types of asset classes, there's an additional checklist attached to each of them that you really have to consider and research and study beyond what you would do for a traditional portfolio.

COLLIN: Yeah, I think that's a great way to frame it. It's not good or bad, but it's "How does adding these change the portfolio? How does it change the risk profile? How does it affect my liquidity needs?" Things like that. So think another piece of the puzzle, but always understanding the why when you're adding something to a portfolio. So Inga, thank you so much. This was a really, really fantastic discussion. I just want to say thank you for joining the podcast.

INGA: Yeah, thanks for having me. It's great.

LIZ ANN: All right, Collin, so we're in mid-May. This year has felt like about two years' worth of months so far, but it is mid-May. So what is on your radar in the next week or so?

COLLIN: For the next week, we have some inflation indicators, which are always important as it relates to the bond market, really all markets, but specifically the bond market and our outlook for the Fed. We'll get PPI, Producer Price Index, and CPI, Consumer Price Index, next week. We tend to focus on CPI more because that really impacts us as consumers. The Fed tends to focus on that more.

The CPI, it's been above the Fed's 2% target for five years and counting. I've been doing the "and counting," because I think if we go back a handful of months, we were somewhat confident that over time it would get back down to 2%. And now it's moving in the wrong direction, unfortunately, mostly due to, obviously, the increase in energy prices, oil and gas prices. But we've seen core prices pick up as well. So we're really going to focus on core CPI, which excludes volatile food and energy prices.

In March, it rose by 2.6% year-over-year, and consensus expectations right now are pointing to a 2.7% increase. So again, move in the wrong direction. We're also going to get retail sales next week. I think that will be really important because that gives us an idea of how individuals, how consumers, are spending their money in light of higher gas prices. Are we seeing that impact?

You mentioned this at the top, Liz Ann. We haven't really seen the impact just yet, or much of an impact, but the longer the conflict goes on, the longer we see higher gas prices, does that start to pull spending away from other areas because people are spending more at the pump? So those are the key things that I'm looking at, inflation, retail sales to kind of give us the state of the consumer. What about you, Liz Ann? What are you looking at, and what should investors be focusing on?

LIZ ANN: Well, I'll mention the jobs report, which will have come out in the morning that we dropped this episode, and everybody will still be digesting that report. And I'd say with not just the report this week, but upcoming reports, look beyond just the two headline readings, which tend to capture most of the initial attention, the number of payrolls created a loss that month, and then the unemployment rate.

Look at the details of payrolls, private sector versus public sector. Look at metrics like hours worked and average hourly earnings. I'd pay attention to the labor force participation rate and the breakdown they often have—male, female, and different age categories, long-term unemployment, not just regular unemployment rates. So I think the details within these numbers are as important to look at as the headline readings.

We also get University of Michigan sentiment, actually, which comes out before this is dropped. But I want to just express not a note of caution, but just an FYI as it relates to that particular consumer sentiment indicator, which recently hit an all-time record low of sentiment. And that hasn't been matched by sort of a commensurate indicator, consumer confidence, which is put out by the Conference Board.

And the reason is that there tend to be more party lines drawn from a political bias standpoint within University of Michigan's consumer sentiment survey. So maybe not a surprise, you're going to get extreme negative readings by those on the Democrat side of the equation. It's also the case that the way the questions are asked with consumer sentiment, answers tend to be more biased by what's going on in inflation, whereas consumer confidence tends to be more biased by what's going on in the labor market. So just wanted to give that little bit of a public service announcement as it relates to that data.

But you're absolutely right, the inflation data is extremely important, because I think that, absent a serious deterioration in the labor market, I think that will be the driver of what the Fed does or doesn't do. And retail sales, too. And there's another one I'd suggest looking inside the numbers at the various categories, so anything consumer related.

We also get import and export prices, and I think that continues to be interesting in that looking at import prices, you get a bit of a sense of how tariffs are working their way into the system. And then more recently, export prices bring in the fact that we have kind of ramped up energy exports, so that could have some impact there. And then finally, we get industrial production, manufacturing production, capacity utilization, and those are embedded in coincident economic indicators, so those will be on my radar as well.

COLLIN: You know, Liz Ann, let me jump in, and I want to kind of second what you just said about really digging into data because there's so much data out there, which is a good thing. But depending on who you're reading or listening to, you can probably tell a number of different stories depending on which little nuggets you're pulling from each release. So really take a look at all the data that's out there.

Just this morning, I was reading from yesterday's releases, we got the JOLTS data, the Job Openings and Labor Turnover Survey, two kind of recaps, and they both had slightly different takes because there's so many things. It's like peeling back an onion—there's a lot of layers there—and they had slightly different takes. So it's important to really look at the big picture. And to your point on the jobs report, the unemployment rate and non-farm payrolls, obviously they're important, but there's a lot of data that we can get that might tell something different.

LIZ ANN: That's it for us this week. Thanks for listening. As always, as a reminder, you can keep up with us in real time on social media. I'm @LizAnnSonders on X and LinkedIn.

COLLIN: And I'm @CollinMartinCS on X and LinkedIn. That's Collin with two L's, and the CS is for Charles Schwab. And you can always read all of our written reports, which includes lots of charts and graphs, at schwab.com/learn.

LIZ ANN: And if you've enjoyed this show, please consider leaving us a review on Apple Podcasts, a rating on Spotify, or feedback wherever you listen. And please tell a friend or more about the show. We will be back with a new episode next week.

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