Bull Market Keeps Running—What Could Trip It Up?

MIKE TOWNSEND: It has been six months since April 8, when the president's "liberation day" announcement about tariffs sent the markets plummeting to their low point of the year. When the S&P 500^® closed that day, it was down nearly 20% for the year to that point. 

Of course, we all know what has happened since then. The market has been on a tear, with the S&P 500 up about 35% since then and now up about 15% year to date.

Tariffs didn't go away, but the market has figured out how to price them in. And it seems that's what the market has been doing since early April—figuring out how to adapt no matter what comes out of Washington. The latest challenges to the market include the first government shutdown in nearly 7 years, a softening jobs market, persistent inflation, a dramatically reduced federal workforce, an unprecedented attempt to undermine the Federal Reserve's independence—but the market remains strong. The S&P 500 is in positive territory since the government shutdown began on October 1.

Yet when I talk to investors of all types, there's a real sense of unease, a worry that it can't just continue this way. They wonder whether it's time to pare back a bit. But no one wants to miss out on more gains if the market is going to churn forward in a positive direction.

Welcome 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.   

Coming up in just a few minutes, I am going to be joined by Joe Mazzola, head trading and derivatives strategist here at Charles Schwab. Joe sees the markets through the eyes of a trader, and I want to get his perspective on how traders are thinking about whether this market can sustain this strong upward trend of the last six months, and whether there comes a point where the barrage of news out of Washington every day starts to have more of an impact. 

But before we get to that conversation, here's a quick update on a couple of the major issues I am watching right now in our nation's capital.

At the top of that list, of course, is the government shutdown. We're now more than a week into the shutdown that began on October 1, a result of Congress failing to pass any of the 12 appropriations bills that fund every government agency and program by the October 1 start of the government's fiscal year. As I've said before on this podcast, that in and of itself is not unusual—Congress has not passed all 12 bills by the October deadline since the late 1990s. 

But usually Congress passes a short-term funding extension, called a "continuing resolution," to keep the government operating. Those continuing resolutions can last a few days, a few weeks, even a few months. In fact, last year, Congress passed a series of continuing resolutions that funded much of the government for the entire year.

Last month, with the shutdown looming, the House of Representatives passed a temporary measure that would provide funding for government operations until November 21, essentially buying Congress about seven weeks of additional time for negotiations on the appropriations bills. That plan passed the House by a single vote.

But in the Senate, a continuing resolution needs a 60-vote supermajority. There are only 53 Republican senators, one of whom, Rand Paul of Kentucky, is opposed to these kinds of short-term funding measures, so he votes "no." That means that Republicans need at least eight Democrats to join them in supporting the temporary funding and the re-opening of the government in order to get to that magic number of 60 votes.

Through Monday, October 6, the Senate had voted five times on the plan to extend government funding until November 21, and the best outcome so far has been 55 votes in favor—still five votes short of the 60 vote threshold. Republican leaders in the Senate plan to keep calling for votes as a way to pressure Democrats into changing their votes and opening the government. 

Democrats want to negotiate for some of their own priorities in exchange for their votes for the temporary extension. And they're particularly focused on extending enhanced subsidies for buying health insurance via the Affordable Care Act, which are set to expire at the end of 2025. If those subsidies aren't renewed, the premiums for subsidized enrollees will increase an average of 75%. While some Republicans are at least open to a discussion about that, they want it to be separate from the issue of opening the government. 

Democrats also want to make sure that the White House can't agree to funding just to get their votes and then turn around and cut those programs that they don't like. That's a harder sell for Republicans, as the White House is using the shutdown as a way to do exactly that.

So, we've got a standoff. And how and when it will end is, frankly, anybody's guess.

One thing to watch is that there are some informal talks going on behind the scenes among Republican and Democrat senators about some kind of deal. Right now, those talks do not include the leadership of either party, but if there's a breakthrough among this informal group, I expect leaders of both parties would get behind it. 

The bottom line is that this only ends when one side blinks. And right now neither side appears close to blinking. 

The White House has been seeking to make this shutdown painful for Democrat-leaning cities and states. The administration cancelled about $18 billion in funding for projects in New York City and more than $2 billion in grants for a transit project in Chicago. It also cancelled about $7 billion in green energy-related grants. But an analysis of those cancellations found that about 20% of those cuts impacted Republican Congressional districts, a reminder that every government decision affects voters from both parties.

One notable impact of the shutdown for investors is the lack of economic data. The Department of Labor announced that the Bureau of Labor Statistics would not be releasing economic reports during a shutdown. Last Friday should have seen the September jobs report come out, but it did not. If the shutdown continues into next week, that has the potential to impact the October jobs report as well, given that the period when the BLS is collecting data typically spans the first 12 days of each month. 

On the inflation side of things, September's Consumer Price Index or CPI readings are scheduled for release on October 15, but again only if the government has re-opened by then. A lack of good jobs data or the latest inflation numbers would certainly make things trickier for the Federal Reserve to finalize its interest rate decision at the next FOMC meeting, scheduled for October 28 and 29. 

Historically, the market has not had much reaction to government shutdowns, and the first few days of this one have continued that trend. But if the shutdown extends into the back half of October, it's worth keeping an eye on whether volatility increases, particularly if there is growing uncertainty about how the Fed will handle that meeting at the end of the month. Right now, investors are expecting another 25 basis point interest rate cut at that meeting—the probability of that was about 95 percent as of October 6, according to the CME FedWatch tool, which uses Fed funds futures to track investor expectations. But I'll be keeping an eye on the trend line to see if that confidence level begins to fall over the next few weeks.

Speaking of the Fed, I also have an update on how the Supreme Court has stepped into the battle over whether the president can fire a member of the Fed Board of Governors. President Trump moved to fire Fed Governor Lisa Cook in late August, citing unproven allegations of mortgage fraud as the cause. The attempt to fire a Fed governor is unprecedented—no president has attempted to remove a member of the central bank since its founding in 1913. But a judge ruled in early September that Cook was "substantially likely" to succeed in her claim that her firing was unlawful and that she could continue to serve while her court case proceeded. An appeals court upheld that ruling right before the September Fed meeting. That decision allowed her to participate in and vote in the September meeting, at which the Fed lowered interest rates by 25 basis points.

Last week, the Supreme Court concurred with that decision. And the Court announced that it would hear oral arguments on the issue in January of 2026. That means that Cook will continue to be on the job and can participate in the two remaining Fed meetings this year, scheduled for the end of this month and then mid-December. And, given that there is no timetable for when the Court will rule after it hears arguments in January, it is reasonable to assume that Cook will remain at the Fed at least through the first meeting or two of 2026.

Finally, last week the White House made a couple of personnel decisions that directly impact investors. First, it withdrew the nomination of Brian Quintenz to be the chairman of the Commodity Futures Trading Commission, the CFTC. Just a few months ago, Quintenz, who served as a commissioner at the CFTC in the first Trump administration and now works for a crypto company, seemed on a glide path to confirmation. But in recent weeks, Quintenz's nomination started to attract some concern from inside the crypto community, and now the White House has decided to start over and pick someone new. There's no telling how long that will take. 

The CFTC is a much smaller regulatory agency than the SEC, and I's focused on regulating derivatives, options and commodities. But legislation moving on Capitol Hill will boost the CFTC's profile by designating it as the primary regulator for the cryptocurrency space. 

As I have detailed on the podcast before, the CFTC is a mess right now. It only has one of its five commissioners to run the agency, and that one is the Acting Chair, Caroline Pham, who has already announced that she will resign once a successor is confirmed. Sounds like she'll have to wait a bit longer as the White House is back to square one on a new chair.

Also last week, the White House pulled the nomination for the next head of the Bureau of Labor Statistics. The president fired the previous head of the formerly very low-profile agency back in August after a poor jobs report. He nominated E.J. Antoni, an economist at the conservative think tank Heritage Foundation. But Antoni's views were controversial from the start, and it became clear in recent weeks that he was unlikely to win enough support in the Senate to be confirmed. So now the White House is starting over on that nomination as well. A long-time BLS official who served as acting head of the agency for a period during the first Trump administration, is again serving as the interim head of the BLS and he will remain in that role for now. There is widespread agreement in Washington that the BLS needs to modernize its data collection processes, but it's unclear whether that will happen under interim leadership.

On my deeper dive today, I want to take a closer look at what's going on in the equity markets, and how traders in particular are navigating a market that is up double digits year-to-date but still feels fragile. When I talk to investors, not necessarily traders, but ordinary investors, they're happy with how the market has been performing, but worried that this trajectory is not sustainable, that there are too many economic uncertainties threatening to derail the market's momentum. I think a lot of investors also feel overwhelmed by the daily barrage of news and policy pronouncements and political machinations that are dominating Washington these days. But traders tend to filter out the noise and really concentrate on the fundamentals of how companies are performing and what the economy is doing, and I suspect there are some lessons that can be learned from having that kind of attitude. 

To help dig into this idea, I'm really pleased to welcome to the podcast Joe Mazzola. Joe is the head trading and derivative strategist here at Charles Schwab. He has more than 25 years of experience in the industry, including time as a portfolio manager and an options strategist. Where Joe really shines is in trader education, helping all levels of traders, from novices to very advanced and seasoned traders, navigate the markets as they endeavor to take advantage of market volatility, manage risk, and maximize returns. Joe, thanks so much for joining me today. 

JOE MAZOLLA: Hey, Mike, thanks for having me, bud. How you doing?

MIKE: I'm good. I'm looking forward to this conversation, and I want to start by getting your sense of where the trader's mindset is right now. Major indexes are up solidly year-to-date, but of course it's been a bit of a bumpy ride to get here, with stocks plunging to near bear market territory back in early April and really roaring forward since then. As you know, I spend most of my time talking to more traditional long-term buy-and-hold investors, many of whom have mixed feelings about a positive market with concerning underlying economic data, particularly around inflation. There are plenty of bears and nervous investors who are just waiting for something to tell them to go ahead and take profits. 

So how are you thinking about what's been kind of an odd year for the market so far, and where do you think we're headed as we get into the fourth quarter of 2025? Are you worried that a downturn is lurking out there, and if there is, do you see it as an opportunity to add some quality stocks to our holdings? 

JOE: You're right. It's been an absolute roller coaster, right? And a lot of that volatility comes from the uncertainty that's made its way out of Washington, and the shifting expectations around company earnings. So, , if a business faces rising costs or unclear demand, they're going to give murky outlooks because they're having to adjust on the fly, and they're adjusting to the changes in their cost structures. So if you get cautious outlooks, that often will elicit negative perceptions from investors, and that can cause short-term drops in stock prices like we saw, right? So sometimes those prices don't reflect the intrinsic or real value based on the fundamental factors, but they reflect how investors and traders are feeling at the time. It's really more of their sentiment. 

And I think what really stood out earlier this year was how the individual investors reacted. During that big sell-off in April, it was the retail traders. It wasn't the large institutions, but it was the retail traders that stepped in. They were the ones to buy. They bought the dip. They clearly saw that there was some value there. And it's something that we picked up in our Schwab Trading Activity Index. People were buying big, well-known tech and artificial intelligence companies because they saw a tremendous opportunity to buy high quality stocks at a major discount. And these were companies with piles of cash, sterling balance sheets, and rising profit margins. 

And I think that investor confidence has helped keep pullbacks from turning into full-blown downturns. I don't know if you know this, Mike, but since August 1, we've only had one day, and that was August 1, where we saw more than a 1% move, or pullback, in the market. Part of it is that buying that dip mentality is still alive. And part of that is that they're not letting markets pull back any further because they are stepping in. And so that momentum, it's been strong as a result. 

MIKE: Well, I am a big fan of the buy-the-dip approach, always very appealing. Nice to think about getting a bargain price and then seeing that stock go up quickly. But there's also a lot of cash socked away in money markets that investors are still holding onto. So is this because they just don't have the stomach right now for the market? Are they holding on for a better sign to jump in or is something else at play here? 

JOE: Well, I think the key is balance. I don't actually see today's high money market balances with all that cash on the sideline as fear. I see it as them developing a new type of portfolio strategy. I mean, remember, for the first time in, what, 15, 20 years, investors, they can earn around 4% in their money market accounts, and they can do that as a complement to their equity portfolio. So instead of having to choose between cash or stocks, now investors are learning to use both. They can keep their long-term stock positions while also earning steady income on their cash. And they're doing just that, Mike. Household percentages of stock holdings, it's at an all-time high. And it's not about hiding from the market. It's really about making your money work in different ways. 

MIKE: You mentioned some of the noise coming out of Washington a moment ago, and obviously that's a big focus of mine. We had a government shutdown start last week. Historically, markets have not been too affected by government shutdowns. In fact, this may be a well-worn statistic by now, but I do think it's relevant. The S&P 500 has actually gone up during the last five shutdowns. That includes a rise of more than 10% during the 35-day partial shutdown from late 2018 into early 2019, during the first Trump administration. But neither the dollar nor the economy are as strong as they were going into the last shutdown. And I've heard more concern this time that the markets may not be too happy this time around. What's your sense of how traders are thinking, particularly if it ends up being an extended shutdown, maybe a month or more? 

JOE: Yeah, I think that's the key. If I were to be honest, Mike, I would say that I'm truly surprised at how well the markets have performed, given that tumult in Washington. If it's a couple days, a couple of weeks, I think that's fine. But once you start getting into that month or more, right, similar to what we saw in 2018, that long shutdown could really hurt consumer spending if hundreds of thousands of federal employees are furloughed or unpaid. And there's a ripple effect, right? That ripple effect could show up in weaker retail sales, slower growth, slower demand, and ultimately a declining GDP, which if we look back at last week, was revised from 3.3- up to 3.9%. That revision could be lower the further along we go. But I think on top of that, it also is going some doubts about Washington's ability to manage fiscal policy. And that creates short-term volatility in these markets. So far, investors, they seem to believe that this will be a short standoff, but if it lasts, Mike, we could see more market swings. 

MIKE: Yeah, I think it's hard right now to tell how long it's going to last. I've got a couple of key dates that I'm watching. October 10 is the date that federal employees will miss their first paycheck since the shutdown started. October 15 is the next time military personnel are supposed to be paid, and obviously they won't be paid at that time if the shutdown is still going on. So it will be interesting to see whether sentiment and sort of public thought on the shutdown starts to change then. So that's definitely something I'm going to be watching for. 

There's another specific result of the shutdown that seems very relevant to the markets, and that's the lack of economic data coming from the government. Last Friday, of course, we were supposed to get the September jobs report, but that didn't happen because the Bureau of Labor Statistics is closed during the shutdown and not producing that information. If the shutdown continues, then it will mean we won't get inflation data as scheduled later this month. The Federal Reserve's next meeting is at the end of this month, October 28 and 29. Not having jobs data and inflation data, I would think, is going to make that meeting awfully difficult. 

While the Fed may not have new official data on jobs for the October meeting, just looking at private data, factoring in additional layoffs and furloughs from the shutdown that the administration has promised, that could possibly keep them in a holding pattern with no rate cut in October. Traders, of course, have been anticipating one or even two more rate cuts this year, but if there isn't one in October, and then there's only one more meeting in December for a possible cut. What will it mean for the markets and for traders if there aren't any more cuts in 2025?

JOE: I think if the Fed decides to hold rates steady longer than expected, look, there will be some areas of the market that could feel it more than others. And that's primarily the small-cap stocks. You know, they've had a run. In August, they were up 9.5%. They did fairly well in September. But those small-cap stocks, they tend to rely on short-term borrowing, and they're more sensitive to interest rate changes. So if you're thinking about the Russell 2000, around 40% of those companies are comprised of non-profitable companies that don't have the same credit quality of the mega-caps. And they often have to borrow for shorter-term, and with the Fed controlling the front end of the curve, those shorter-term rate cuts directly benefit those companies. And if those rate cuts don't come this year, well, look, those smaller companies, they're going to face more pressure. That's maybe in contrast to the large cash-rich firms that could hold up better. But I think for traders, that means paying attention to both how different these sectors respond, rather than assuming that all the stocks are going to move together. And Mike, as you mentioned, right now, investors and analysts, they see about a 95% chance of a quarter-point cut at the Fed meeting in October. But it's the 85% chance of one in December that might change. And I think that having a lack of data for the Fed, it makes their job pretty tough because they're going to need that inflation data, especially at around 2.9% is kind of where they're pricing in right now. But with the limited data and the Fed talking about a pause, there's no guarantee you're going to get both those cuts. 

MIKE: Yeah, that's certainly going to be interesting to watch as they head toward that meeting on October 28 and 29.

Another area of Washington-driven uncertainty for the markets, Joe, tariffs. A new set of tariffs on products, including trucks, furniture, kitchen cabinets, pharmaceuticals were announced late last month. At the same time, the Supreme Court is going to hear arguments early next month on whether the bulk of the president's tariffs, those so-called reciprocal tariffs on about a hundred countries, as well as some of the tariffs on imports from Canada, China, and Mexico, are even constitutional. So far, though, the tariffs have not really produced inflation levels that I think a lot of people expected, though, clearly, the Fed and others remain worried that tariffs could increase prices for consumers as soon as this fall and particularly heading into the holiday shopping season. Earnings reports, as you know, start to come out in mid-October, and those could give us some insight into how tariffs are impacting companies. How are traders thinking about the impact of tariffs? Are they concerned that by the end of the year they will be contributing to inflation? What are they watching to see how companies are or will soon be impacted by tariffs? 

JOE: I think traders, for the most part, have digested the tariffs fairly well, just like the market has? I think there's this belief that it's the fall, it's the winter where those data points are going to start showing. I think part of it is just… if you look at the last couple quarters, they've been strong. In fact, with earnings, about 80% of the companies have beat expectations, and overall, the S&P 500 earnings forecast are near record highs. 

Now, that's the last two quarters. And I think part of it is it's taken a while for the tariffs to make their way through the economy. If you think about certain sectors or certain stocks, it's probably the mega-caps that can weather that storm a little bit more. And I think part of that is just because the cash positions that we talked about, and investors, they're starting to aggregate towards those larger mega-cap companies, and, their day in the sun isn't over. And we talked about the Schwab Trading Activity Index a little bit earlier, but when we look at that we're looking to kind of track what retail trading activity looks like. And right now, it's showing us that investors are still making that shift towards the AI plays, and eventually these traders hope to see the strength spread to other sectors. We haven't seen it yet. It's still been kind of a narrow rally, but for now, as long as earnings stays strong and guidance remains positive, the market has support. 

MIKE: Well, I expect that both you and a lot of companies are eagerly anticipating that Supreme Court debate that is coming down the pike. November 5 is the date that those arguments will be heard. Both sides have asked for an expedited decision on the tariffs, which could by some estimates put a decision in hands as early as early December. So that's going to be certainly something to watch. As you and I have talked about, Joe, the idea that maybe that all gets tossed out, and we have to start over on tariffs, that would certainly be quite a market reaction, I bet. 

Joe, I want to pick up on the AI conversation. It really feels like the AI-driven companies have been carrying the markets, but a lot of investors that I speak with feel like they don't know what to believe when it comes to picking stocks in this area. To a lot of investors, it feels kind of like a bubble, maybe like the dot-com era, and like you said, these are riskier investments. So how can investors who maybe aren't following the sort of micro details on a day-to-day basis get in on this hot streak for AI-related companies? A lot of investors are relying on exchange-traded funds or mutual funds to be capturing this upside. Can that be an effective route to go? Or are individual investors missing out on bigger opportunities by not holding individual stocks? 

JOE: Well, it's funny that you asked that question, Mike, because when we run our STAX report, that shows the behavior activity, and right now we're seeing a lot of bullish sentiment. But at the same time, we also do what we call like an attitudinal survey. So we ask the traders kind of how they're feeling. And it's interesting, they're buying artificial intelligence as a powerful theme, all the companies within that sector, but at the same time, they're saying that they think it's overpriced, and that they're concerned that a pullback could occur. So I look at it two ways. I see the money flowing into it, but I also see that there's a wall of worry. So it kind of gives me a little bit of confidence that there's a little bit more room to run with those names. But look, it's still early. It's still hard to tell, and it's still really hard to predict which companies will be the long-term winners, especially since many of them are new investor favorites that are trading at high multiples, and they can be extremely volatile. 

So I think instead of maybe chasing some of those individual names, Mike, for many investors, it's using ETFs or mutual funds that might make more sense, especially those that kind of focus on artificial intelligence, the technology and that innovation. That will give you some exposure to that theme while spreading out the risk across a few dozen companies. And you can also look at the picks and shovels. If you don't want to look at just the chips, you could look at the firms that are providing the tools, the infrastructure for AI, cloud providers, or even the energy companies that are supporting these data centers. Interestingly enough, if you look at market breadth per sector, I think a lot of people would assume that IT has the best breadth. And what does breadth measure? It really measures how many companies within that sector are performing above a certain moving average or beating all-time highs. Well, the sector with the best breadth right now is utilities, and it's because of the needs of these data centers for the energy, and it's because of the amount of money that's flowing into those sectors. 

So there's plenty of ways to look at this for investors. The key is really to diversify and understand what's inside any fund that you buy. If you look at the top holdings and how much weight they have in each company, I think that's a really important lesson to apply. You can also find a lot of that data pretty easily, right there on schwab.com underneath the Research tab.

MIKE: Yeah, Joe, I love your comment about the utilities performance because I live in Northern Virginia where there are tons and tons of data centers, and right now energy and water are the really big sort of controversial issues in our area because those data centers need so much of both. I guess I can understand why the utilities…

JOE: You've seen your bills go up?

MIKE: I have seen my bills go up, yeah. 

JOE: Me too.  In the Bay Area. Yeah.

MIKE: Well, Joe, this has been a great conversation. I want to end by getting your insights on a couple of scenarios that a lot of investors are thinking about right now. So first, let's start with individual stocks that are in our portfolios and have done well in the upturn since April. How long should we let things run? Is it time to start trimming, maybe take some profits?

JOE: That's a good problem to have. You got the markets rallying over 35% from the April lows. When I'm on the road and I'm talking to clients, that's one of the questions that they're asking quite a bit, is, 'Hey, at what time do we start trimming?' And what I tell them is, taking some profits can make sense. It helps you lock in gains without exiting those positions completely. And I think it makes sense to sell a portion of some of those winning positions, and then look to reinvest elsewhere, or keep some of that cash ready for the next opportunity. 

What's interesting is if you look at how the sectors have performed on a monthly basis, I would love to tell you that there's been one sector that's done really well, but it's been a rotation. Sometimes it's difficult for investors, or even traders at that point that might be a little bit more short-term focused, to pick that rotation and see when it's coming. 

But what I would say is, for those who have more experience, do something like this, adjust your stop orders higher, move them up, especially on those positions where you've already seen large gains. You can use technical analysis as a way to find some support levels and use those as guidelines for your exit points. We have a whole library of content on technical analysis using stop orders and portfolio management as a whole through our Schwab coaching webcasts. And you can access those, Mike, at schwab.com/coaching. 

MIKE: You know, on the other side of the equation, we talked earlier about the big cash reserves that investors have, and your point on money market funds being a good part of an overall strategy, I think is a really, really important one. But for those who are ready to put some of that cash back into the market, what's a smart approach without taking on too much risk? 

JOE: I'd say scale into it. You don't have to allocate everything all at once. Look for pullbacks. Remember, we're heading into earning season, and markets are at an all-time high. And expectations, I think that's an important component, Mike, is right now, expectations for earning growth are high. They're around 10% year-over-year on a market that's already trading 23 times forward earnings. If you look back at Q1 and Q2 earnings, expectations were around 6.5, 8%, and we crushed them, but now the bar is higher. So if we do get some type of a pullback, some disappointing guidance, something like that that causes some type of a price adjustment, look to go shopping for high-quality, high-cashflow companies with positive earnings guidance, you might get your chance. 

MIKE: Great guidance, Joe. Really, really appreciated this conversation. Thanks so much for taking time to talk to me today. 

JOE: Thanks for having me, Mike. 

MIKE: That's Joe Mazzola, Head Trading and Derivative Strategist here at Schwab. You can follow him on X @JoeMazzolaCS. 

Well, that's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks.

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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.