Why This Market Keeps Changing Its Mind

Collin Martin · Charles Schwab

Many households are insulated from rate hikes: locked-in mortgages and asset-rich boomers.

Parts of the economy are not very rate-sensitive. Homeowners locked into low mortgage rates who do not plan to move are largely unaffected by higher borrowing costs, while buying a home is hard at current mortgage rates. Baby boomers hold many assets and few rate-sensitive liabilities, so their spending is less exposed to rate hikes. Collin admits he is overgeneralizing, and expects the pain to show up more on the business side.

“there's parts of the economy that just aren't very rate sensitive right now... if you're locked in at a low rate and you have no plans of moving or selling your house anytime soon, you know, the rise in borrowing costs might not bother you.”at 4:31

Liz Ann Sonders · Charles Schwab

Consumer credit cracks are confined to subprime borrowers, not yet visible in higher-quality credit.

Delinquencies and defaults, including consumer and auto loans, are starting to accelerate but remain concentrated in subprime categories. Those are where the cracks are showing. Higher-quality borrowers are not yet showing the same stress. She also describes the economy as K-shaped, with upper-income consumers doing better than lower-income ones.

“you're seeing things like delinquencies and defaults, problems whether it's with consumer loans, with auto loans are starting to accelerate a bit, but generally down spectrum, more in the subprime categories. And that's really where you're starting to see a lot of cracks. You're not seeing it, you know, fully up the spectrum to higher quality borrowers.”at 6:52

Liz Ann Sonders · Charles Schwab

Within small caps, profitable, low-debt companies are beating weaker-balance-sheet peers by wide margins.

Using the Russell 2000 as an example, profitable companies outperform by about 20 percentage points. Companies with low debt-to-equity and stronger balance sheets beat those with high debt-to-equity and weaker balance sheets. She argues this granularity shows where the winners and losers are as the Fed and long-term rates move, and how closely stocks react to rate expectations and long-end volatility.

“within the small cap universe, let's use the Russell two thousand as a... An example of that. You've got about a 20 percentage point spread in favor of outperformance by the profitable companies.”at 7:27

Liz Ann Sonders · Charles Schwab

The market will keep rotating sharply between defensive sectors and tech, making sector calls hard.

Recent weeks have brought big swings: defensive segments such as health care and consumer staples had days and weeks of strong outperformance, then a tech boom day left health care at the bottom of the intraday ranking. She expects the market to stay rotational, with rolling growth and contraction at the sector and segment level. Trying to predict the next shiny object is a fool's errand, so she suggests using rebalancing rather than chasing the rotations.

“we're just in this massive rotation mode right now... we are seeing huge swings... we've had these days and even weeks of significant outperformance by some of the more defensive segments of the market, things like health care and consumer staples.”at 9:28

Liz Ann Sonders · Charles Schwab

Back-to-back index swings reflect hedge-fund hedge flip-flopping, not a sign of market doom.

After the post-election up day, short-horizon institutions and hedge funds chased the rally and removed hedges. The next day the Nasdaq fell 6% and the S&P 500 fell 4%, and those institutions scrambled to rebuy protection. That positioning whipsaw explains the extreme back-to-back moves. Historically, some of the biggest down days have come right after the biggest up days, and vice versa, so reacting heavily to a single big move is risky.

“In many cases, a lot of that institutional community took protection off. They took hedges off... Then the following day happened where you had a 6% drop in the Nasdaq, 4% drop in the S and P 500.”at 14:31

Liz Ann Sonders · Charles Schwab

Retail investors did not buy the dip last week, but their buying has since resumed, including heavy Nvidia buying.

On last Thursday's big down day, retail investors did not buy the dip. Vanda's data showed little retail buying, which is why the usual intraday bounce did not happen. Retail interest has since returned somewhat, and on Tuesday retail investors bought the second-largest amount of Nvidia stock on record, so a buy-the-dip mentality may be back. She does not know how long it will last.

“there was not a lot of dip buying on the part of the retail investor or the retail trader... And it was sort of crickets in the retail buying crowd last week.”at 16:11

Collin Martin · Charles Schwab

Fed will hike in December and again in early 2027 because inflation remains too hot.

Collin says the October CPI print supports his unchanged view that the Fed will keep raising rates, with a hike at the December meeting and another in early 2027. He points to sticky core inflation and to recent hawkish Fed comments: Governor Waller said a 50 basis point hike is a risk he would not dismiss, and Dallas Fed President Logan said faster hikes may be needed this winter. He argues the labor market is fine, so the Fed must bring inflation down, which is half its mandate.

“We think the Fed will likely continue to raise rates. We expect a rate hike next month at the December meeting, and then we expect another hike in early twenty twenty seven.”at 0:55

Collin Martin · Charles Schwab

Core inflation is sticky and broadening into services, so inflation remains too hot.

Core CPI rose 0.3% in October, its third straight monthly gain of 0.3% or more. On a three-month annualized basis it rose to 3.75%, its highest in about two and a half years. Collin says this is not just an oil or tariffs-and-goods story, since core services prices are also still rising, and services inflation is what the Fed can control.

“Inflation is just too hot right now... It's a sticky issue, maybe not necessarily a significant reacceleration issue, but it's clearly still sticky.”at 1:10

Collin Martin · Charles Schwab

Highly indebted businesses with volatile cash flows will feel pain from higher interest costs.

Companies borrow far more often than consumers, so rate hikes will hit them more directly. Collin expects some pain for the most indebted businesses, especially those with volatile cash flows, as higher interest expenses cut into their profit margins.

“companies, they borrow a lot more frequently and regularly than than us as consumers. And I think we'll probably see some pain there for some businesses, the ones that are the most indebted, the ones that maybe have volatile cash flows as they start to see your higher interest expenses kinda eat into their profit margins.”at 5:15

Collin Martin · Charles Schwab

Ten-year Treasury yields are biased modestly higher, driven by growth, inflation and Fed expectations rather than fiscal worries.

Collin says fiscal concerns are not the key driver of Treasury yields; the main drivers are the economy, inflation and expectations for the Fed. After the election, gridlock had pulled yields down by easing fiscal worries, but the ten-year was back to 5% a week later, which shows how quickly this can change. That is why he sees some upside for the ten-year, though not a lot.

“We've long held that we don't think fiscal concerns are the key driver of treasury yields right now. We do think it's more about the economy, inflation, and expectation for the Fed... Maybe not a ton, but I think it's biased upwards.”at 18:04

Liz Ann Sonders · Charles Schwab

Data center buildout relies on imported equipment, so its import growth does not add to domestic GDP.

Much of the equipment needed for the AI data center buildout is imported. That import growth does not feed into domestic GDP, since the D in GDP is domestic. Higher import prices relative to export prices would also feed the broader inflation discussion. The speed and amount of money spent on data centers could also roll back, which the election may have changed.

“That's increasingly important because so much of the AI data center build out... the equipment that is needed, that is largely on the back of imports. So a lot of that build out is import related and that matters because the import growth doesn't feed into domestic, gross domestic product.”at 20:31