Market Turmoil: It's More Than Just Tariffs

MIKE TOWNSEND: One of the oldest adages in the book is that markets hate uncertainty. Of course, companies also dislike uncertainty—it makes it impossible to plan. And uncertainty makes investors skittish.

The first 50 days into Donald Trump's second presidency have been filled with uncertainty. Lots of it.

Last week, he made tariff headlines on four consecutive days. On March 3, he announced that the 25% tariffs on imports from Canada and Mexico that he had imposed in February and then delayed for a month would go into effect as planned on March 4. Once in effect, they triggered retaliation from our neighbors and sent the markets to their worst day since December. On March 5, after a direct request from the three largest American car companies, Trump announced a one-month pause on tariffs affecting automobile imports from Canada and Mexico, and on March 6, he announced another one month pause, this time on the tariffs on any products in compliant with the U.S.-Mexico-Canada free-trade agreement. The effect of that order was a temporary reprieve from tariffs on about half of all imports from Mexico and about 38% of imports from Canada. 

What did investors think of all of that? The S&P 500^® dropped by 3.1% last week, its worst week since last September. It's down more than 6%since its all-time high on February 19. And it has given back all of its gains since Election Day.

But there's more. New tariffs on aluminum and steel are set to kick in this week. By early next month, tariffs on pharmaceuticals, semiconductors, and automobiles are set to take effect, as well as reciprocal tariffs, which seek to match what other countries are doing on a country-by-country and product-by-product basis. Companies and investors are waiting for details on how those will be implemented.

And tariffs are just the tip of the iceberg. Below the surface, there is even more churning. Layoffs of federal workers have barely begun to show up in the jobs numbers, but they will. The Department of Government Efficiency, or the DOGE, has been shutting off federal funding to hundreds of programs. And that's starting to have a trickle-down effect, impacting state and local government workers, veterans, teachers, employees at non-profits that rely on federal funding, and in countless other places where the slashing of government programs is just beginning its ripple effects.

As these changes begin to impact more and more people, concerns about inflation are up. Recession concerns are up. Consumer sentiment is down.

It's not a good mix for investors or for the Federal Reserve, which meets next week to assess how all of this will affect the economy in the months ahead. Even the experts at the Fed are uncertain.

So where can worried investors turn?

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, Kevin Gordon, director and senior investment strategist with the Schwab Center for Financial Research, will join me to share his thoughts on the different factors buffeting the markets and the economy, as well as some ideas for investors to consider in these tumultuous times.

But I want to begin with three things I'm watching in Washington right now.

First, this week Congress is scrambling to avoid a government shutdown. This is the latest battle in a standoff that dates to last fall, when the previous Congress failed to pass any of the 12 appropriations bills that fund every government agency and program by the start of the current fiscal year on October 1. The lack of those appropriations measures meant that Congress was forced to approve a temporary extension of government funding, known as a "continuing resolution," to ensure there wasn't a shutdown just a few weeks before the November elections. That first agreement expired in December, and Congress passed another extension that funded the government only through March 14.

As I record this, House Republicans were attempting to pass another extension that would fund the government through the end of this fiscal year, on September 30. The proposal includes a small boost to defense funding and a small cut to other domestic spending. That would then have to be approved by the Senate, where the votes of at least seven Democrats would be needed to ensure the necessary 60-vote supermajority is reached. It's a tricky spot for Democrats who are not eager to accept the Republican plan but also worry that shuttering the government would only exacerbate the hardship for federal workers already facing uncertainty about their jobs via the sweeping DOGE cuts. Democrats are also concerned that the president won't spend money that he is legally required to spend.

The reality is that continuing resolutions are a terrible way to implement policy. Though narrow margins and sharp political divisions often leave leadership with little choice. Funding the government each year is arguably the single most basic responsibility of Congress. A year-long series of continuing resolutions means that programs are funded at last year's levels—with no consideration given to whether those are still the appropriate funding levels. The appropriations process is supposed to be the mechanism each year for Congress to review programs and decide whether their funding should be increased, decreased, or perhaps even terminated, if the program has served its purpose. None of that is happening on a regular basis. At least one continuing resolution has been used in each of the past 28 years. This will be the 138th continuing resolution since the last time all 12 appropriations bills were passed on time in 1997.

Historically, the market has not cared much about government shutdowns. There have been 21 shutdowns since the mid-1970s, lasting as few as a day and as long as the 35-day partial shutdown from late December 2018 to late January 2019, during Trump's first presidency. Overall, the market reaction has been mixed. But the S&P 500 has actually gone up during the last eight shutdowns, including rising more than 10% during that most recent shutdown.

But while history says that a shutdown, if one happens in the coming days, will not be a big market mover, I do have a concern that it would be one more entry into what investors see as a growing list of chaos and uncertainty coming out of Washington.

Government shutdowns are not to be confused with debt ceiling fights. The markets react with much more volatility and concern to debt ceiling showdowns and the risk of an unprecedented default. The debt ceiling battle will hit Washington sometime around the middle of 2025—another element of uncertainty that the markets will face later this year. 

Second, last week saw a number of actions that cemented the stunning turnabout in government policy toward cryptocurrency. As expected, President Trump signed an executive order creating a Bitcoin Strategic Reserve. The president likened it to the nation's reserve of gold, though Bitcoin is inherently less stable than gold.

The administration said that the reserve would initially consist of about 200,000 Bitcoin that the government has seized from criminals in recent years. But even top administration officials admitted they were not sure of the exact amount of Bitcoin that the government currently holds. The executive order requires a government-wide audit of cryptocurrency holdings.

The order also creates a separate "digital asset stockpile" that will include Ether, the second-most common cryptocurrency, as well as lesser-known digital assets like XRP, Solana, and Cardano.

On March 7, the president convened the first-ever White House Crypto Summit, joining Treasury Secretary Scott Bessent, the White House AI and Crypto Czar David Sacks, and about two dozen executives of crypto companies. Just a few months ago, many of the companies represented at the meeting were facing lawsuits or investigations by the SEC and other regulators. But since Trump took office, the SEC has dropped almost all of those cases.

The turnaround marks a stunning shift in tone toward an industry that has battled the federal government for years, and that President Trump himself called a scam in 2021.

While little concrete action emerged from the summit, much of the discussion was reportedly about how to pass legislation that creates a better regulatory framework for digital assets. There is bipartisan support for doing so on Capitol Hill, though many details still need to be worked out. But it's clear that cryptocurrency has a new seat at the table when it comes to policymaking in Washington.

Finally, a short update on where things stand with the massive legislative package that Congress is developing to implement the meat of the president's policy agenda, including tax cuts and spending cuts. To begin that process, both chambers need to pass a budget blueprint, known as a budget resolution, that outlines the overall spending and revenue goals but does not contain any details.

The two chambers have passed wildly different versions of the budget blueprint. The House has approved a plan that calls for $4.5 trillion in tax cuts and at least $1.5 trillion in spending cuts. The Senate's much narrower plan totals just $340 billion, and covers only energy, border, and defense spending. Toward the end of March, the Senate is expected to consider the House version, though it's likely to make changes that will necessitate sending it back to the House for another vote.

And all of that is just the first step. Meanwhile, the House Ways & Means Committee began consideration this week of what tax cuts should be included, beyond extending the 2017 tax cuts that are set to expire at the end of 2025. The president weighed in during a joint address to Congress, reiterating his call to include ending the taxation of tip income, overtime hours, and Social Security benefits, as well as making the interest paid on auto loans tax deductible. It's unlikely that all of those can be included without exploding the federal deficit, so tough choices for Republicans lie ahead.

The pace of things so far is a reminder of how complicated putting together the details of this bill is going to be. While Republican leaders are talking about passing a final package by Memorial Day, I think August 1 is a more realistic goal, and I would not be surprised if this process drips into the fall. 

On my deeper dive this week, I want to take a closer look at what's going on in the markets, where all of the accumulating uncertainty around the Trump administration's massive policy agenda seems to have reached a breaking point. The market is now negative year-to-date and has given back all of the gains since Election Day. Tariffs have moved from threat to reality. Key data and sentiment measures are starting to send warning signals about the broader economy, and a lot of investors are starting to wonder if it's time to move into a more defensive posture.

To help me sort through it all, I'm happy to welcome back to the podcast Kevin Gordon, director and senior investment strategist with the Schwab Center for Financial Research. I really enjoy talking with Kevin, particularly in times of market turmoil, because he brings a clear, calm, and thoughtful perspective about the markets that feels rare in an era of snappy hot takes. Kevin, thanks so much for joining me today.

KEVIN GORDON: Hey, Mike, great to be back with you. Thanks for having me.

MIKE: Well, Kevin, for the first month or so of Trump's presidency, the market seemed pretty sanguine about all the executive orders and policy pronouncements, about Elon Musk and the DOGE, about the rapid pace of upheaval in Washington generally. But about three weeks ago, the market shifted its view pretty abruptly. Some of that was the implosion of the U.S.-Ukraine relationship and the resulting deterioration of the U.S. relationship with the European Union. Some of it was perhaps an acknowledgement of just how unpredictable the policy environment has become. But I think the biggest piece is tariffs. The market seemed initially to be interpreting tariff threats as more a negotiating ploy than reality. Well, now they're very real, with more to come. And they are harshest on our closest allies, Canada and Mexico. I've been saying for months, as have you, that tariffs are inflationary. Now the tariffs are here, inflation expectations have been surging. Companies like Best Buy and Target are already warning consumers the price increases are coming. So where do you see inflation heading, and how long will it take to start showing up in stores and in the data?

KEVIN: Well, there are some technicalities at play here in terms of definitions, but I think they're important to go through. So almost by definition, tariffs do result in a one-time upward shift in price levels, and that might be thought of as inflationary. But if you think about a one-time price adjustment, it is just that—it's a one-time adjustment. And just as an example, if you think about a consumer paying $10 for a good, and then the price of that good is raised to $12 in one month, clearly that's a huge increase. But if that $12 is then unchanged for the next year, and then anything after that, the year-over-year percentage increase in that price will eventually come back down to zero. 

So you can think of a one-time price level increase that way, but it's admittedly hard to apply that kind of simplistic thinking to tariffs, because in the real world, which is where all of us live, we have to consider many other aspects, such as if other countries are going to retaliate with their own tariffs, and then we suddenly find ourselves in a tit-for-tat trade war. And that's a scenario in which you could definitely see tariffs become inflationary because countries would be raising tariff rates almost continuously. And to some extent, you're already seeing a little bit of this, given Canada and China have announced retaliatory tariffs after the administration went ahead with implementing tariffs last week. But of course this all literally changes by the day. After the implementation, there was an announcement of a delay for some of the tariffs for Canada and Mexico. So who knows if something is getting adjusted at the time you and I are having this conversation? But so far what we've seen is potentially inflationary.

And it's probably not going to show up in the data anytime soon, but I actually don't think that higher inflation is what we have to worry about when it comes to tariffs. I think the potential negative hit to growth is much more important. And to some extent, we're already seeing this in business surveys, given many companies are citing this thick fog of uncertainty that has been created by tariff and trade policy coming from Washington. It really has effectively put a stop to their ability to make more comprehensive capital spending or hiring plans.

MIKE: Yeah, Kevin, I think that's a really good point that you make about how it's a one-time potential price increase. I think the problem for a lot of people is that price increase then gets baked in, and sort of never comes back down if the tariffs go away, and we just have this new higher level of price, even though it may not be inflationary in the data. So that'll be interesting to see how that unfolds.

You were talking about economic growth, and between our tariffs and the retaliatory tariffs that are coming online, some early estimates are that the average U.S. household will pay about $1,200 more this year. So what types of industries and products are likely to be most impacted? Are there particular items that you're watching the prices as maybe kind of a bellwether for the broader economy, or are price increases likely to be hyper-specific, like avocados from Mexico?

KEVIN: Yeah, well, estimates will vary a lot because of how much of a moving target this is, but ultimately, it's not difficult to envision a scenario in which households end up paying more, especially assuming that tariffs get implemented and then they stay on. And given tariffs are paid by U.S. importers, there's just two options when it comes to what is done with them. So either the U.S. importer eats them into their margins, or they pass it on to consumers. And we know from history that businesses tend to do the latter. And actually that $1,200 statistic you cited comes from the Peterson Institute for International Economics, and they've done really great work on this. And the estimate, and this is a little bit stale now because of the recent announcements we've gotten from tariffs, but if you think about kind of the bulk of what has been proposed—the 25% tariffs on Canadian and Mexican goods, along with the 10% increase for Chinese imports—if you take that in conjunction with the extension, the presumed extension of the 2017 tax cuts, only the top 10% of the country would be better off. So that means that the cost from the tariffs outweighs any benefit of increasing the tax cuts or extending the tax cuts for the bottom 90% of the country. And of course, and, again, I feel like I'm going to be a broken record on this in saying that this is going to be a moving target and change by the day, but Peterson will likely have to update that estimate. As I mentioned, there's been another 10% increase for tariffs for Chinese imports implemented in addition to whatever comes for any other country.

And in terms of the areas that are hit the hardest, we can look to the top imports by value from both Mexico and Canada, mostly because there is much more at stake economically with those two countries. And in terms of import value, our three largest imports from Mexico are transportation equipment, electronics and electrical machinery, and then overall machinery. Our three largest imports from Canada are fuel, transportation equipment, and metals. And there's other crucial imports as well. And just some statistics to put it in reference or in context, 88% of our lettuce imports are from Mexico. 86% of our tomato imports are from Mexico, we get 98% of our oats imports from Canada, and we get 100% of our potato imports from Canada. So we're talking about these staple items that literally feed us, all potentially facing huge tariff increases.

MIKE: Tariffs have been, obviously, dominating the debate over the last week or two, but there's another of the president's major initiatives that I think will ultimately have a significant impact on the economy, and that's immigration policy. It feels like it's been under the radar a bit, in part, because I think the administration is realizing in real-time the logistical challenges of large-scale, or frankly, even small-scale deportations. The pace of deportations is not what was promised. That's an issue that is reportedly irking the president. But while deportations are actually below the pace of the Biden administration at the moment, encounters at the border are way down, which means fewer people are trying to cross the border illegally. Setting aside for a moment the moral questions that underlie immigration, the fact is that workers who came to this country illegally remain incredibly important to the economy and to the jobs market. The Pew Research Center estimated last year that there were about 8.3 million unauthorized workers, which represents nearly 5% of the entire U.S. workforce. So is there a tipping point in your mind where a crackdown really starts to impact the economy?

KEVIN: Probably, but I really like what you say about the morality of this, and I just want to hit on that point really quick. We, as analysts, are not here to argue morality when it comes to any economic issue. We're really here to just deal in facts and statistics. And I think this is crucial, especially because most of these things we're discussing are really hot-button issues. And if you look at immigration, the math is pretty simple. So if you remove a good chunk of the workforce, even in the mid-single-digit percentage range, like you mentioned, if you do that, you take out a lot of potential growth from the economy, because these are individuals who contribute via spending and also paying income taxes. So you're talking about a potential reduction in an overall output. And over the past five years, the average annual growth in the labor force has been about 0.6%. Had it not been for the nearly 4 million increase in foreign workers, that statistic would have been flat, and that would have reduced U.S. potential growth significantly.

And in keeping with that, just another statistic to help put this into context, our economy has become much more reliant on immigrants. And if you see them leave the labor force, it puts economic growth at risk. So since 2020, the beginning of 2020, if you go back to before the pandemic, the increase in the foreign-born labor force has grown by 18.4%. The increase in the native-born labor force has grown by just 0.7%. And there's a host of reasons for that huge split, not least being the significant uptick that we saw in early retirements in the U.S. right after the start of the pandemic. But fortunately, immigrants were able to plug that gap and then some. And the added benefit I would mention and emphasize is that immigrants tend to have higher labor force participation than native-born individuals.

MIKE: So as that trickles through, are you seeing the impact in some key sectors or industries?

KEVIN: Well, for immigration, specifically, it's tough to say, given this is all still so fresh. But we can look at some of the industries that have a high share of immigrants in their workforce. And, actually, now that we have the February jobs report, we know that the leisure and hospitality sector, which certainly has a high share of immigrants in its workforce, that actually has seen employment contract by 30,000 jobs in the past two months. And that's the largest decline since the beginning of 2021. What's interesting, though, is that construction, which also has a high immigrant worker share, that sector has seen a net 21,000 jobs added over the past two months. So those are a bit at odds with each other. But this is not going to be a straight line for every industry. It's not going to be a straight line for the economy. Plus, the key industry that's missing from the monthly jobs report is the agriculture sector, and that's actually where most of my concern is. And we've heard from various agencies, including the USDA, estimating that around 50 to 60% of the agriculture sector is made up of undocumented immigrants. So you could imagine the stress that that industry would undergo if these workers were removed from the country.

And I think one more thing that is underappreciated with all of this is the chilling effect that's already at play. And I often get a lot of pushback when talking about the risks from deportations and a slowdown in immigration, especially when you think about deportations, what you mentioned, the logistical difficulties associated with deporting the number of people that the administration has proposed. Yet, what I'm already seeing, whether it's in accounts from the media or my own discussions with clients in this space, is that there are large chunks of the agricultural workforce just not showing up for work, simply out of fear that there are going to be raids near them or at their workplace. And that's been a pretty striking development, and I've been hearing it firsthand from clients who work in the sector.

So I'd just watch that space really carefully in the coming months, especially because of this potential hit to our food system.

MIKE: Yeah, I think combined with the tariffs on key food items that you mentioned earlier, the potential impact on food prices is really, really concerning, and that's obviously a place where the average person really notices prices.

I want to stick with the labor market for a moment. As you know, I live here in the Washington, D.C., area, so most of my conversations with neighbors and friends and colleagues are about the disruptions from the DOGE on the federal workforce. Almost everyone I know has a zero or one degree of separation from a federal employee. It's just been a very common topic of concern and conversation. But federal workers represent less than 2% of the total workforce, so it's not necessarily going to have a big effect on the overall jobs numbers. We're already seeing it affect the housing market here in the D.C. area, but there are lots of other locations around the country where there are large numbers of federal workers, and it could impact those areas as well.

KEVIN: Yeah, you're right to point out the small share of the workforce that is the federal government, but we're starting to see the DOGE-driven cuts show up in the data. And as I mentioned, we just got the February jobs report last week, and it showed a decline of 10,000 federal government jobs, which in relative terms, that's not a catastrophic number, but it was the largest decline since June of 2022. And so I'd shift more focus probably to the March jobs report, especially because a lot of the recent federal layoffs likely fell out of the Bureau of Labor Statistics Survey period in February. Plus, if you look at job cut announcements, which are reported every month by the firm Challenger, Gray & Christmas, those spiked in February to their highest since the pandemic. And actually, if you look before the pandemic, job cut announcements are at their highest since 2009. And when firms were asked by Challenger, Gray & Christmas, why they were asked why they made job cut announcements, the dominant reason cited was DOGE. The second and third top reasons were bankruptcy and just broader economic conditions, respectively. And so when you combine that with the fact that cut announcements were highly concentrated in the federal workforce, it's plausible to see a continued deterioration in that workforce in the coming months.

But what I'm more focused on and more worried about is the potential hit to state and local payrolls. And even though federal jobs, like you mentioned, they make up just 2% of overall payrolls, state and local employment accounts for about 13% of payrolls. So now you're talking about a much larger chunk of the workforce that is at risk. And we know that there are linkages, important linkages, between federal and state and local employment.

MIKE: And it's not just state and local workers. We're starting to hear stories about non-profits that are relying on federal funding considering or even starting layoffs. Colleges, universities, hospitals, other recipients of federal grants for research, they're starting to see that flow of money turned off. Companies of all sizes that have federal contracts, they're starting to be impacted. So while it's not showing in the numbers yet, it feels like it's coming. Since inflation and jobs are two of the main drivers of Fed policy, it really feels like the Fed could end up in a very tricky spot here.

KEVIN: Yeah, I really don't envy the Fed here. I'm not sure how the members are supposed to come up with any viable forecast at this point because, like us, they're humans, who are mostly flying blind in this environment. And look at the policy backdrop that they're dealing with. Tariffs are on one day. They're delayed the next day. You've got this potential shrinking of the workforce via deportations and mass firings at the federal level. I could easily put together an inflationary outcome from that set of circumstances, but I could just as easily, at the same time, put together a negative growth outcome. And in the former instance, the Fed would hike rates. In the latter instance, the Fed would probably cut. But the problem is that that mix of higher inflation, slower growth, and an uptick in unemployment is stagflation by definition. And that's exactly what the Fed dreads. But we should also be careful not to automatically compare that potential stagflation outcome to the stagflation that we had back in the 1970s, because it's not as if we're seeing a double-digit increase in inflation tomorrow, and we're going to see a double-digit increase in the unemployment rate. But I would stress that the policy mix you're dealing with has the potential to at least push things in a stagflationary direction.

MIKE: Speaking of the data that the Fed relies on, last week, the new Secretary of Commerce, Howard Lutnick, publicly suggested changing the way a key economic metric, GDP, is calculated, by stripping out government spending from GDP, an idea that appeared to originate with Elon Musk. I found this a bit baffling because the GDP report already breaks this data down, so you can see how much government spending is or is not contributing to the economy,

KEVIN: Yeah, I'm not really sure what the specific plan is or if there is one with this, but I'm not sure what the goal would be in, quote, "stripping it out." And to your point, government spending, along with the various other components, it's already sectioned out every time we get a GDP report. And the same goes for consumer spending, business investment, net exports, so on and so forth. So if the goal is to completely ignore government spending altogether, I'm not sure that makes a lot of sense, especially since the government is a huge consumer, and always has been a key part of the economy.

MIKE: Yeah, and it opens up a larger question, something I was asked about by an investor at a recent event, about whether government data could become less reliable, either intentionally or as one of the side effects of the DOGE effort to reduce federal employees and programs. The concern here is twofold. First, that either the government could intentionally manipulate numbers to make the economy appear stronger than it is, or to make inflation seem lower than it is; or second, that the result of firing experienced federal employees and making changes to systems could result in more mistakes and less accurate data. Investors rely on this data to make decisions. Companies rely on this data. If it's less reliable, the market is just going to have a much harder time understanding what is actually going on.

KEVIN: Yeah, and it's interesting you say that because I've started to get a lot more questions from clients and investors on this very subject. And I never thought we'd have to consider this, but yes, we'll have to monitor whether there is a data quality issue with some of these firings, especially if they're going to touch key agencies like the Bureau of Economic Analysis or the Bureau of Labor Statistics, which we rely on for key data. And the rub is that this is potentially happening as we're still attempting to recover from the pandemic-related drop in survey response rates.

So if you think about key economic surveys, like the job openings data or monthly non-farm payrolls, those saw their response rates plunge during the dark days of the pandemic for somewhat obvious reasons. The recovery since then has been very slow, and that's one of the reasons that we have at times seen these larger revisions in the data. And it doesn't necessarily mean that the data are poor, or they can't be trusted; it just means that it's taken a bit longer for us to get a clear read on what they ultimately show.

So if you see these layoffs in agencies that conduct these surveys, that would likely only make the problem worse. So yeah, it's something I'm watching very closely because if you don't have confidence that data are either coming in on time or credible, then we as investors can't get a clear read on the economy, and then we can't get a clear read on the market.

MIKE: We've touched on a number of concerns that you have, no question. Has any of this altered your view on the odds of a recession?

KEVIN: So the short answer is yes, but I think that there should always be context given around either a recession call or a recession warning. And I like to think of it more in terms of how the environment has shifted, and whether the economy is more vulnerable to a recession. So given the slowdown in immigration, this rolling over in business animal spirits, the pickup in firings at the federal level, the more defensive posture of the stock market, I'd say yes, given all of that, there are enough indicators that are telling us that the odds of a recession have increased. But that's not to say that these indicators are telling us that a recession is around the corner. I still think that there's enough evidence today to suggest that we're in an expansion.

And I'd be mindful of some of the potential head fakes that are looming, one of which is potentially the first quarter GDP report, which is looking a little grim at this point. And if you look at the Atlanta Federal Reserve's Nowcast—it's called GDPNow—it takes in data on a rolling basis, and then it calculates what GDP would be in real-time, what growth would be for the current quarter. And it's currently at negative 2.4% for the first quarter. That is a huge decline from the prior quarter, and it's actually quite worrisome on the surface. But if you look below the surface, nearly all of that decline is being driven by what's called the net exports component. So it just means that we've seen a recent surge in imports, and that's outnumbering exports by a significant degree. A lot of that, I think, is being driven by this pull forward in consumer spending as they anticipate higher tariffs.

So consumer spending itself is expected to be positive. It's still relatively healthy, but the surge in imports is what's driving that negative nowcast figure right now. And that would be kind of a light example of a head fake. So you've got negative net exports themselves, not driving the economy into a recession, but definitely pulling down headline GDP growth. But if there is enough of a knock-on effect where consumer spending and business investment ultimately slow, and they don't necessarily have to go negative, just if they slow, you can definitely see the risk of a recession rise much faster.

MIKE: Yeah, interestingly, Kevin, over the weekend, President Trump twice declined to say that there was not a risk of a recession, and I think people are looking into that comment, or lack of a comment, and maybe saying that concerns are rising even in the White House. So given all that we've talked about today, what's an investor to do? The Magnificent Seven, they don't seem magnificent anymore. Foreign markets are outperforming U.S. markets. So is it time to turn defensive, and if I want to turn defensive, where should I look?

KEVIN: Well, you're certainly right, the Mag Seven, they've been underperforming the rest of the market this year, and in fact, they're some of the worst performers in the S&P 500 year-to-date. And yes, the U.S. has fallen behind relative to the rest of the world. I would say the caveat to that point is that we are coming off of several years of U.S. outperformance. So the strength from areas like Europe, for example, should be looked at in context.

And our take on being defensive in the market has revolved more around factors or characteristics, as opposed to sectors. Especially given we're still in this elevated interest rate environment, and economic growth has gradually slowed, and I would emphasize the word "gradually." We think it continues to make sense to stay up in quality across the spectrum of equities. So even if you're looking at an area like U.S. small caps, for example, they tend to be a little bit riskier, they usually rally sharply, and they outperform when the economy is emerging from a recession, which we have not had for a while, even in that area or that asset class, we still think it makes sense to screen for companies that would have strong earnings, or healthy guidance, or high interest coverage, among other things.

So that's really what we mean when we talk about factors and characteristics, as opposed to having just a sector bias or a sector view. We still have those, but the reality is, over the past few years in the stock market, at least in the case of the United States, you've been able to find more consistent outperformance, and at times, more consistent defense when you're looking at factors and characteristics because you can find them in every single sector. You don't have to be focused on just a handful of them.

MIKE: Well, great advice, Kevin, and of course everyone's individual situation is unique to them, so be sure to reach out to your financial consultant to talk about how your particular circumstances could be impacted by what's going on and what might make sense for your portfolio.

Kevin, always enjoy the conversation. Really enjoyed today's talk. Thanks very much for joining me.

KEVIN: Always great to be with you, Mike. Thanks for having me.

MIKE: That's Kevin Gordon, director and senior investment strategist here at Schwab. I highly recommend following Kevin on X @KevRGordon. His feed is a festival of interesting charts and commentary.

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

Take a moment now to follow the show in your listening app so you get an alert when that episode drops, and you don't miss any future episodes. And I'd be so grateful if you would leave us a rating or a review—those really help new listeners discover the show.

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

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