Kevin Gordon, Director and Senior Investment Strategist at Charles Schwab (SCHW), spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): The Wall Street Journal published an article about a survey showing that investors haven’t been this pessimistic about stocks since 2023. Are you seeing this data over at Schwab?
KEVIN GORDON (KG): So not reflected to the extent that that survey from the American Association of Individual Investors is showing. That is mostly, I think, reflective of what’s going on geopolitically from a trade war, tariff war perspective, and maybe to some extent from an immigration perspective. And we’ve seen a little bit of a rolling back in ETF flows specifically in the equity market, which is what I cover, but not to the extreme in terms of the spike in bearishness that that particular survey is citing. I will say what’s been really interesting in this post-pandemic era is the swings in attitudinal sentiment are much wider and much more skittish than what you would see on the behavioral side of things. So since the bear market ended in 2022, we really haven’t seen this massive shift in equity market positioning. If anything, the exposures kind of crept higher over time. In some metrics, we’re at the most exposed in terms of American investors most exposed to equities that we’ve ever been, so it’s not necessarily being reflected in some of the surveys that you cite, but I think to some extent if you do start to see, or at least continue to see a pickup in bearishness, and if there is a more sustained level of bearishness, then you could probably start to see that at some point being reflected in equity market positioning. I think the bigger story is kind of being told at the sector level and how much of that is more rotation versus pulling out of equities altogether. There’s been a much more interesting shift at play where there’s been more outflows from tech and tech-related areas, like communication services, to some extent consumer discretionary, and more going into areas like financials and more cyclical-dominated areas in parts of the market.
AM: Tech had a huge year last year and now things appear to be evening out. How are you preparing investors and clients that you work with?
KG: Yeah, at the sector level, in terms of our ratings and rankings, we still have two outperform right now for financials and communication services. Tech is labeled as a market perform for us, so kind of in that neutral category. The one underperform we have is consumer discretionary. And the reasoning is a mix of, you know, you’ve got heavy concentration from the two largest members in that index, which is Amazon (AMZN) and Tesla. But apart from that, there are still some pressures in that sector, especially for areas like home builders. If you think about facing that double whammy of potentially higher input costs for materials via tariffs or a little bit more of a strain on the labor force. If you are to see more of a carrying out of either deportations and or more of a curbing of immigration, there’s a little bit more of a struggle for that sector, at least from a margin standpoint. But from a positioning perspective overall broadly for the market, especially as it relates to a lot of these policy cross-currents that we’re facing, it’s more about managing expectations around volatility and understanding that these swings that we could see based on day-to-day tariff developments or based on day-to-day labor market developments or eventually tax policy that’s likely to persist. The kinds of swings and excitement you get when tariffs are delayed, but then that pessimism that starts to creep back in when there seems to be more aggressive action being taken for tariffs. That, to us, is what’s going to make this year very different from last year. Because last year, pretty remarkable in terms of low volatility at the index level, the max drawdown for the S&P 500 was 8.5%. That’s a pretty great year for the market. This year we just expect more swings and wider swings in both directions.
AM: Interesting. So you’ve mentioned some emotionality driving like investor sentiment, but the behaviors aren’t changing. Is there a thing that investors should look for in the news or with Trump or tariffs where they should behave differently?
KG: I think that once you start to get more details and so-called meat on the bones with tariffs or immigration, ‘cause we really view those as the two big policy spheres or discussions for this year, maybe for the next several years. But if there’s more details and if you actually start to see tariffs enacted, that’s a very different scenario than what we’ve seen so far because what we’ve seen so far, excluding the 10% rate that has been applied to imports from China, there really has been just kind of discussion and talk. We’ve had these minor trade disputes, whether it was the very brief trade dispute with Colombia or the also very brief trade dispute with Canada and Mexico. Those tariffs have been delayed, not canceled. But if those start to go on and then you actually start to see more material increases in price levels, but also subsequently potentially a hit to business confidence or potentially a hit to business CapEx, that’s where we would focus the most attention in terms of the eventual hit to the equity market. So it’s tough right now because this does change day-to-day in terms of what tariffs are going on, which country it’ll be applied to, how long they’re going to last. So until you get that material action of tariffs or if we ever get there, that’s when we start to put more context around what this actually means. But it’s tough now because it’s mostly speculation because nobody knows what’s gonna happen, you know, three days from now or three hours from now.
AM: Awesome. Thanks a lot, Kevin.