MIKE TOWNSEND: They say foreign policy doesn't really matter in U.S. elections, and it's true that voters consistently rank foreign policy issues low on their list of top priorities. In the most recent Gallup poll, taken in September, foreign policy was the 18th-highest ranked concern among voters.
Yet it's also true that foreign policy issues hang over this election. Voting this fall will take place beneath the shadows cast by the ongoing war in Ukraine and the rapidly escalating situation in the Middle East.
It will take place as central banks, including the Federal Reserve, wrestle with changing economic conditions and adjustments to monetary policy.
It will take place as China's government injects major stimulus into their struggling economy, while at the same time China continues to try to expand its influence across the Asia-Pacific.
And the election here at home will continue a trend seen around the world in 2024, where more than half the planet's population lives in a country that has had or will have a major election this year, potentially changing the trajectory of these nations' economic and diplomatic policies.
That's a lot of uncertainty to take into account, especially when it comes to how the policies and economies of other countries can impact our own economy.
While U.S. voters may not necessarily be making decisions based on these factors, savvy investors are always watching what is going on around the world with an eye toward finding opportunities and balancing risks in a diversified portfolio.
So what should investors take away from the variety of uncertain situations that currently exist around the world?
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'm going to look at several of these issues with Jeff Kleintop, Schwab's chief global investment strategist. We'll talk about China's economy, the situation in the Middle East, Japan's aging population, how central banks around he world are watching the Fed, and how all of it affects global investing opportunities.
But first, here are three things I'm watching in Washington right now.
Number one, any drama about whether there would be a government shutdown at the end of the month was quickly erased on September 25 as the House and Senate each passed a short-term funding bill, known as a "continuing resolution," that will keep the government open and operating through December 20. Both chambers then adjourned until after the election. At the end of the day, the desire among lawmakers of both parties to get out of Washington and hit the campaign trail was overwhelming and led to an agreement to kick the can down the road.
Congress is expected to return to Washington on November 12 to begin what is known as a "lame duck" session. These post-election sessions are notorious for their weird dynamics based on the election results. Some of the members may be about to retire. Others may have just lost their re-election race. Yet they'll have to come back to Washington to deal with that new government funding deadline just before the Christmas holiday, along with several other pending issues. That is likely to be a very tricky debate, heavily influenced by the election outcome and what the balance of power will be on Capitol Hill when the new Congress begins in January.
But lawmakers may find their break interrupted. Earlier this week, President Biden floated the idea that he might need to call Congress back into session to pass emergency relief for victims of the devastating Hurricane Helene in North Carolina, Georgia, Florida and other states. There has already been some bipartisan support for that idea. Now there are available disaster-relief funds, but the question will be whether there is enough to address the crisis. Even if the government has enough funds available now, President Biden indicated that Congress will likely have to replenish the disaster-relief coffers when it returns to Washington in November.
Second, there was a notable development late last month at the SEC that is likely to eventually affect virtually every investor. The SEC voted to approve a rule that allows stock exchanges to price shares in half-cent increments, a move the agency hopes will produce more competitive pricing and ultimately reduce investor costs. The SEC also believes it will allow the exchanges to compete with off-exchange trading venues, which account for nearly half of all trading volume and are already permitted to price stocks in smaller increments.
The decision came on a relatively rare 5-0 vote at the agency, where commissioners are frequently divided 3-2 along party lines. It was the SEC's latest step in an ongoing effort to overhaul how trading works. The agency proposed a series of four major rules nearly two years ago, and earlier this year approved one that will provide investors more information about the execution quality of their trades.
This latest rule, which is scheduled to take effect in November 2025, would allow for half-penny pricing in stocks whose bid-ask spread, or the difference between the sell price and the buy price, hovers around a penny – which is currently the smallest increment stocks are allowed to price at. The result of this plan will be a two-tiered system, where some stocks, usually smaller, less frequently traded stocks, will continue to price in one-cent increments, while others would move to half-cent increments. An SEC study indicated that about 1,800 stocks would qualify for the new system, though it did not identify the specific stocks in that category. In finalizing the rule, the SEC backed away from parts of its original proposal, which would have allowed pricing in one-fifth or even one-tenth of a penny.
With more than a year until this new rule takes effect, there will be plenty of time to get more details about which stocks will be switching to half-penny increments and to sort out how it will impact investors. But the SEC hopes that it will ultimately save investors money and increase the accuracy of pricing.
Third, all five SEC commissioners made an appearance at a hearing before the House Financial Services Committee last week. It was the first time since 2019 that the five commissioners had appeared together on Capitol Hill, and just the third time in nearly two decades.
As these hearings go, it was pretty typical, with members of congress bashing SEC Chair Gary Gensler for his aggressive regulatory agenda and for finalizing a series of rules that have later been overturned by the courts.
But I was struck by one moment of bipartisanship during the hearing. Both Democrats and Republicans are frustrated with the SEC's oversight of the cryptocurrency space and recognize the need for a better regulatory framework. Earlier this year, the House actually passed a bill that would create such a framework, giving primary regulatory authority over cryptocurrency to the Commodity Futures Trading Commission, the CFTC, with the SEC in a secondary role. At last week's hearing, the Republican Committee Chair, Rep. Patrick McHenry of North Carolina, and the panel's top Democrat, Rep. Maxine Waters of California, pledged to work together before the end of the year to, in the words of Congresswoman Waters, "strike a grand bargain on stablecoins." Stablecoins are a type of cryptocurrency that is pegged to the dollar or another currency. McHenry called stablecoin legislation "the bipartisan will of the committee."
Now that doesn't mean something is going to pass during the lame-duck session of Congress that begins in November. But I do think it is indicative of the growing momentum in Congress toward creating a better regulatory structure and more investor protections for cryptocurrency generally. This is clearly a policy issue to watch in 2025.
Finally, at all of my speaking engagements, taxes are always a hot topic during the Q&A. Last week, I published an article that examines the debate over tax policy that looms next year and explores the flurry of tax proposals that have been made in recent weeks by the two presidential candidates. It touches on a number of tax topics of interest to investors that could be part of next year's debate, including the estate tax, capital gains tax rates, the state and local tax deduction and what in my view seems to be an overwrought discussion of whether there could be any taxation of unrealized gains in the future. You can find the article on schwab.com/learn, and we'll put a link to it in the Show Notes.
On my deeper dive today, there's obviously a lot going on around the world that impacts investors, so I want to focus on some recent geopolitical developments, how they are affecting global markets, and where there might be opportunities for investors who are looking outside of the United States. I'm very pleased to welcome back to the podcast, Jeffrey Kleintop, Chief Global Investment Strategist, here at Charles Schwab. Welcome back, Jeff. Thanks so much for taking the time to talk today.
JEFF KLEINTOP: You bet. Thanks for having me. Mike.
MIKE: Well, lots of topics I want to get to today, but let's begin with some big news for the global supply chain, the strike that began this week with about 45,000 dock workers at U.S. ports on the East Coast walking off the job. What are the implications for global trade and the potential impacts on the U.S. consumer?
JEFF: The Port of New York and New Jersey combine to be the U.S.'s second largest by volume, but dozens of East Coast ports are affected, accounting for about half of US container volume. I tend to talk a lot about supply chains because they're so vital to the global economy. I find that a good rule of thumb is that it takes about a week to clear a day's volume of cargo from a port that's in a strike. And that comes from shipping advisory firm, Sea Intelligence, and also from Maersk, which is one of the largest providers of ocean transportation. So backups can cause a chain of problems. One day can lead to a week of backup. So for example, semiconductor materials like the ultrapure quartz mined in North Carolina, that's essential for making silicon wafers, and it's the world's primary source. So shipping delays risk a slowdown in global chip-making. Also most U.S. imports and exports of pharmaceutical products go through these now idled ports potentially creating life-threatening delays. And U.S. agricultural exports, like eggs or pork from East Coast ports can't wait additional weeks without risking going bad. So even a relatively short strike of around seven to 14 days can have impacts on specific industries but will probably not have major economic impacts on the availability of goods and prices, in part because importers have already been frontloading shipments and diverting some of their activity to the West Coast in anticipation of a potential strike.
But, a longer strike, say, 30 days or even 90 days, could become a much more important economic issue, taking as long as half a year to clear, possibly similar to what we saw back in 2021, when several factors led to unprecedented congestion at the port of Los Angeles and Long Beach, which led to shortages and really helped to drive inflation back then. And then the Fed and other central banks sat on the sidelines delaying rate hikes despite rising inflation, since they were unsure whether to keep easing monetary policy due to the economic slowdown from slower production and lack of materials or to hike them on the risk of further cost push inflation. And the stock market fell into a bear market in 2021 and may not welcome lingering supply chain issues this year either.
So we'll have to keep a close watch. I expect a relatively quick resolution given what's at stake.
MIKE: Let's hope so, because as you point out, there is potential for big economic and political fallout from the strike. Economists have estimated that the strike could cost the economy anywhere from 3 billion to as much as 7½ billion a week, numbers that could start to impact jobs data, inflation, and more. And of course, this is all taking place with an election just five weeks away. President Biden has said that he will not use a federal law known as the Taft-Hartley Act to force dock workers back on the job, but that could certainly change if the strike drags on and the economic impact starts to become a factor in the presidential race. So lots of dynamics to watch here over the coming days and weeks.
Well, Jeff, let's move to China. There's been a lot of news in the last few months about how their economy is struggling. Just give us a little background on what's going on with their economy.
JEFF: It's a big economy, so I'm going to give you a lot of background. China's economic problems feed into each other. So let's walk around this circle. China's weak property market caused fiscal policy to aggressively tighten this year, and that reinforced a drag on the economy, and then further weakened the property market. So to try and break that cycle, China's central bank aggressively eased monetary policy with rate cuts in September and that served to lift China's stock market, but it echoes a pattern that's fizzled in the past.
So let me give you some more background. Fiscal spending has come in a lot lower than last year and policymaker's plan. In China, the general government budget only tells part of the story. China has three additional national budgets—the Government Funds Budget, the State Capital Operations Budget, and the Social Insurance Fund Budget. It's that first one, the Government Funds Budget, that's the source of the fiscal tightening. See, the plan was for China's Government Funds Budget this year to include 7 trillion renminbi in revenue and 12 trillion in spending. And that was a deficit of 5 trillion, expanding from 4 trillion last year, and that additional trillion in spending provides an economic boost. Now, although the year was two-thirds of the way over as of the end of August, which is the latest data we have, the deficit was only 2.1 trillion, when it should have been 3.7. And that resulted in an unintended 1.6 trillion tightening of fiscal policy acting as a drag on the economy, rather than stimulus. This shrinking Government Funds Budget is largely the result of local government's land sales coming in much weaker than anticipated for now the third year in a row, following China's clamp down on borrowing by large real estate developers, they simply can't afford to buy the land. And the slow pace of land sales means revenue is down 21% from last year. That's hitting spending, but the local governments aren't even spending as intended on upgrading land infrastructure for sale. So the weak property market meant government spending has acted as a drag on the economy and reinforced the weakness in the property market.
Now, to make up for the shortfall and to try and break this cycle of weakness, local governments can issue special local government bonds to finance more infrastructure spending. Now, the quota for special purpose local bonds was set in March, and it has not been boosted to account for this now accumulating shortfall. And furthermore, the central government has been slow to approve projects for special bond funding, wanting to avoid losses on increasing supply of property as property values continue to fall. And that's been bond issuance has fallen even below the now insufficient quota.
Now, it's likely that special bond issuance does accelerate here in the fourth quarter, and if it climbs towards closing the gap and fulfilling that quota, then it could turn around the government fund deficit from a fiscal drag of about 2 trillion to maybe closer to a 1 trillion drag. But that's still a far cry from the planned 1 trillion expansion.
So the government funds deficit, this is the third year in a row now, it's been 1 trillion smaller than budgeted. That was true in 2022 and 2023, and that's accounted for China's lingering economic malaise. China's aggressive easing of monetary policy by its central bank is, in my opinion, unlikely to work without breaking the cycle of tightening fiscal policy. And as a result, China's stock market rally could fizzle and give back much of the gains, as it did in May of this year after 20% rally when the stimulus announcements at that time ultimately failed to deliver real support to the economy, Mike.
MIKE: That's a great description of the complex problems going on in China's economy. My question for you is, is a struggling economy in China good or bad for the United States?
JEFF: Well, that's a complicated issue, but I can tell you it's bad for many U.S. businesses. There are plenty of well-known U.S. businesses with substantial sales exposure to Chinese customers―obvious ones like Tesla or Apple―but also companies that may not immediately come to mind like Nike, or General Motors, or Caterpillar, and even Starbucks, which each have more than 25% of total sales coming from China in recent years, Those sales have been weakening, and it's hard to make up for the declines in mature markets like the U.S.
MIKE: Well, as an investor, how do I evaluate the degree to which stocks I hold are impacted by this? Is it as simple as looking into the percentage of sales that are coming from China, like you mentioned with Starbucks?
JEFF: I wish it was that easy. It's actually more pervasive than that. China's weakness isn't confined to consumer demand for running shoes and mobile phones. It also means slower demand for oil, which can weigh on oil prices and global energy stocks. It can mean falling prices for goods that China is exporting more of since there isn't as much demand at home. Also, it's likely been helping to bring down inflation in some of these categories where global supplies exceeded demand, and that's aided central banks in reaching their inflation targets and let them cut rates. So the impacts are far reaching when the second largest economy in the country with the world's largest middle class, totaling about 500 million people, falls into an extended slump.
MIKE: Well, addressing all that, China took a series of steps last week to try to get the economy moving again. So give us some context around what those moves are and whether you think they'll work. I mean, China's stock market has staged an incredible rally in the wake of the announcement.
JEFF: Yeah, it sure has. They announced interest rate cuts and plans to issue more central government bonds to try to address both monetary and fiscal stimulus. It's a plus but may not work without more being done. There are a few things to watch to see if China's announcements deliver actual results that could boost China's growth and sustain these stock market gains.
First would be boosting local government special bond issuance. Raising the special bond issuance quota by more than a trillion would be needed to ease tight fiscal policy. And last year, they did that in October. They would need to do even more than that this October, I think, given the deeper property downturn. Following monetary policy easing announcements from the People's Bank of China earlier that week, on September 26, China's Politburo announced 2 trillion in issuance of special treasury bonds by the central government, not local governments, but by the central government. It's unclear to me, and in the details of the press release, how much of this would be allocated to boosting growth in local government spending versus being used to recapitalize banks to accommodate the rate cuts or to offset non-performing real estate loans. So again, that first point is we need to see that local government special bond issuance pick up to help turn around the property market. That's number one.
Number two is faster money supply growth in China. To see if falling interest rates make any difference, you've got to see if there's more borrowing taking place now that rates are lower. So we need to keep a close eye on that, consumer and business borrowing, and a sign that it would be working will be if there was more demand for money. So watching money supply growth turn around would be important. It's been negative in recent months, so I'll be watching to see if that ticks up.
And then third, a rise in consumer and business confidence. Consumer confidence is pinned at recession lows. China's policymakers could take some actions to try and revive consumer confidence and reduce those high levels of precautionary savings that are keeping consumption in check and signaling that maybe they're going to reduce business interference with all those sudden regulatory changes that have really held back business investment of recent years.
The stock market rally could boost confidence in the near term, but if it were to again fizzle out, any impact on confidence would be fleeting.
MIKE: So what do you think is the timeframe in which China needs to take any or all of these steps that you've outlined, and how likely do you think it is that they'll do so?
JEFF: Well, the sooner the better, but I'm not convinced they will. We've been writing about what we think China needs to do for well over a year. In fact, I remember writing a piece for the Financial Times, I think back in 2021, talking about what China needs to do. It's been a long time, and I think they've been slow to act for two reasons. First, because they don't want to fuel the kind of inflation shock seen elsewhere when too much stimulus was applied very rapidly in that post pandemic environment. And second, they don't want too much investment to flow back into housing, where it just lifted prices and it was diverted from investment in areas like semiconductors and green tech, where China really wants to develop self-sufficiency for security reasons. But they are starting to finally do more. So I think they get it now, and how the economy responds to the stimulus over the next few months will certainly be telling.
MIKE: Well, Jeff, as you mentioned, one of China's recent steps was cutting the interest rate. That's something, of course, the Federal Reserve just did here in the United States. Other global central banks have been making policy moves, but at different paces. The Fed, in fact, began the rate cutting cycle later than most major central banks. Many countries have worried that if they cut their rates and the U.S. didn't, then they would see serious capital outflows as investors moved their money out to get a higher interest rate in the U.S. With the U.S. now cutting rates, perhaps that concern has waned a bit. But I thought it was very interesting that the day after the Fed cut rates, the Bank of England chose to make no move. So what are the considerations for other central banks? What determines whether they cut or not? And are there any central banks that you're watching, in particular, that investors should pay attention to in the coming weeks?
JEFF: As you note, many of the central banks around the world started before the Fed, and most central banks are likely to cut interest rates more slowly than the Fed from here because they got a head start, maybe cutting every other meeting or once per quarter, and that could further ease concerns about any capital outflows from those countries.
One I'm watching closely, though, is Brazil. Brazil's central bank has been leading the Fed by a year, and it's now started to hike rates again. You know, over the past few years, Brazil has been leading really all the major central banks. Brazil was the first to hike in 2021, that was about a year ahead of the Fed, and the first to cut in 2023, also about a year ahead of the Fed. And now they've started to hike rates again. Like the U.S., Brazil has a tight labor market, and inflation in Brazil bottomed in mid-2023 at 3.2%, kind of like what we've seen in the U.S., but it's now back up to 4.2, and the market has priced in 50 basis points of hikes at the next meeting for Brazil in November, and a total of 200 basis points by May of next year.
So it just leaves me to wonder, could Brazil's central bank be signaling a tougher inflation outlook, challenging central bankers a year from now? I'm not sure, but I'm watching. For now, the Fed is in cutting mode, and the market is convinced that this will last through the end of next year.
MIKE: Well, that's really interesting about Brazil. The situation you're describing there is exactly what the Fed does not want to happen here. And I think that's why the Fed is projecting a slower series of cuts next year, just four right now, and even continuing cuts slowly into 2026, so that it doesn't move too quickly and have to start hiking rates before it's finished cutting rates. Of course, the Fed, like all central banks, is very data dependent. A lot could happen over the next year to alter those projections. So what will the speed at which the Fed moves and how big those moves are mean for other countries?
JEFF: Fed Chair Jay Powell was asked this, and he said, look, all central banks have a domestic mandate. And he's right, each country's central bank is driven by its domestic outlook. But the potential for simultaneous aggressive easing of monetary and fiscal policies in the world's two biggest economies, the U.S. and China, could have global impacts on growth and inflation. It's a real turnaround from where we've been over the last year or two. And after getting an earlier start, it could mean a slower pace of easing is now warranted by other central banks in Europe and Asia, given that the U.S. and the People's Bank of China are now in easing mode. The expectation is for most of those other central banks to skip meetings and cut 25 basis points at a time over the coming year.
MIKE: What about Japan? Japan, of course, is in a completely different place. They're actually back to considering rate increases. Japan, of course, has an aging population and a slowing birth rate, and that must put additional pressure on their central bank because the population isn't spending as much and is needing more government support. So what's your assessment of where Japan's economy is right now and what their central bank will do?
JEFF: Well, as you said, Japan's population is aging, and there's very little immigration there to grow the labor force. So the key isn't for Japan to get more people to work, it's paying the existing workers more. Coordination across governments and business in recent years has led wages to climb steadily above the pace of inflation over the past several years now for the first time in a generation, and that's offered real spending power to consumers and is helping to sustain inflation above 2% for an extended period. And this has allowed the central bank to finally lift rates away from zero. In my opinion, the central bank is likely to go further and longer hiking rates than many expect over the coming year. But still, rates in Japan are unlikely to climb above those in other major economies, given the demographic profile.
For investors, the takeaway may be that a higher cost of borrowing in Japan can lead to a further unwinding of the one trillion in borrowing in yen. That's $1 trillion in borrowing in yen from Japanese banks by foreign asset managers, and that's tracked by the Bank of International Settlements. Two of the most popular trades in recent years have been to go short the yen, essentially borrowing in yen, and to go long U.S. tech stocks. With the yen that cheapest major funding currency to borrow in and tech consistently profitable, it's not hard to imagine a good portion of the $1 trillion borrowed in yen by foreign asset managers has gone into U.S. tech stocks. And so as the borrowing becomes more costly to maintain, either because the yen has gone up 15% or more, or interest rates are creeping higher, it could mean a lingering overhang on investments fueled by that borrowing, such as those in U.S. tech stocks as they're sold to repay those loans, Mike.
MIKE: Well, let's turn to the U.S. election, now, of course, just five weeks away. Traditionally, foreign policy, not a big factor. Polls for decades have indicated that voters just don't place foreign policy issues very high on the list of things that they're concerned about or that influence their vote. But as I've been traveling around the country talking to investors in the last few months, geopolitical issues come up quite a lot. U.S.-China relations are a concern, obviously the ongoing wars in Ukraine and the Middle East. But the biggest issue that I'm getting asked about is former President Trump's proposal to impose across the board tariffs on U.S. imports in the 10- to 20% range and up to 60% on Chinese imports. Of course, there are situations in which tariffs are useful. For example, when a product like steel is being so heavily subsidized by a foreign government that it undercuts the cost of manufacturing it here in the United States. Tariffs can help balance the equation in that kind of situation. And we've seen countless examples of that for decades. But in this case, I find it challenging to respond to questions from investors about the Trump tariffs because at some level, the idea of imposing tariffs on absolutely everything coming into the country, it's just hard to get my head around. Most economists believe that the plan would increase inflation, lead to retaliation, and potentially lead to a global trade war. How are you thinking about the potential implications of this kind of trade policy if Trump were to be elected next month?
JEFF: I'm always thinking about trade, and I've been following the trade talk. It may be easy to toss around ideas at campaign events, but candidate proposals often look very different when turned into actual policies. For example, the Trump tariffs put in place in 2018 and 2019 had almost no impact on overall U.S. tariff rates, since they were applied on very few things the U.S. actually imports a meaningful amount of. The average U.S. import tariff now stands near an all-time low at 2%. So the extent to which proposals of big tariffs actually translates into policy is pretty unclear. But if they did, yeah, the impact on the economy here and around the world would be painful, which is part of why I think they're likely to be watered down significantly. Let me give you an example.
The election of Giorgia Meloni as Prime Minister of Italy two years ago, it was in September of 2022, made her what some are calling Italy's first far right prime minister since Benito Mussolini, and radical policies were widely expected to follow her election, but Italian tariffs are set at the European Union level. So during her campaign, Meloni's proposal to distance Italy from China was to withdraw Italy from China's Belt and Road initiative. That was a huge investment plan intended to deepen trade ties between the two countries, and she was committed to breaking that off. Well, jump forward two years and Meloni just visited China this summer to meet with President Xi and sign agreements boosting cooperation with China and deepening trade ties between the two nations. Italy's economic circumstances necessitated a pragmatic approach to China's trade relations, and that's led policy to be much more friendly than the campaign proposals were.
MIKE: Yeah, it's a great reminder of these things are campaign proposals, and campaign proposals should probably always be taken with a very large grain of salt. Well this election also will have a lot to say about some of the United States participation in various alliances. Last week, President Biden welcomed the leaders of Australia, India, and Japan to his home in Delaware for the so-called Quad Meetings. They reportedly discussed their commitment to continuing the alliance, no matter what happens in the election, and they pushed back on things like Trump's pledge to pull out of NATO if he returns to the White House. But one interesting moment came when President Biden was caught on a hot mic talking about China's aggression in the region. We know about China's military exercises in and around and over Taiwan, but in the last few months there have been additional reports of Chinese ships ramming Philippine vessels, bickering with Japan over unoccupied islands, and more. I got a question at a client event recently about whether these moves were being done as a kind of distraction from China's domestic economic problems. Is this just the same as usual in a disputed region of the world, or is this something more, is this a message that China wants to send?
JEFF: I think it's more the former than the latter. I don't think it's an effort intended to distract China's population from the domestic economic troubles, in part because these actions aren't really new. They flare up from time to time as part of China's ongoing steps to exert tighter control over its maritime region. These actions do risk an accident that could prompt a military response, but that appears unlikely to actually happen to me, and it isn't China's goal. Rather than achieving its goals through provocation, China seems to be achieving its goals politically in the region. For example, we saw more China-friendly South Korean and Taiwanese governments become elected this year.
MIKE: Well, what are the implications of that for the United States if these countries are getting more friendly with China? I mean, after all, we have pretty deep commitments to both Taiwan and South Korea.
JEFF: Yeah, I think it's more of a balance, and I think China's leadership sees it that way, A balance achieved to keep these countries from slipping towards greater U.S. influence. I see it more as maintaining the status quo than prompting an escalation. The political developments make a military confrontation even less likely, in my opinion, with China finding other ways to exert influence in the region to counterbalance U.S. military and economic power.
MIKE: Jeff, the other issue that I'm hearing a lot of investors voice concern about, I'm sure you are too, is the escalating situation in the Middle East, with fighting now expanding into Lebanon, and as we're recording this, news of an Iranian missile strike on Israel. How concerned are you about an even wider war in the Middle East?
JEFF: Well, the human toll is immeasurable, and it's concerning to all of us as citizens of the world, but the economic cost has been small. The news today around Iran launching an attack on Israel may be a major escalation or may echo the attack they conducted back in May, when they swore vengeance for an airstrike that killed the top IRGC commander, which turned out to be minor and symbolic, and thwarted by Israel's air defenses. Oil at one point was up 4% today on the news. It's given some of that back. And that's the way we see conflicts in the Middle East, and those that involve a major oil exporter, like Russia, impacting the world economy and markets. It's typically through oil prices. Oil and natural gas prices are down since both conflicts began. Ever since the war broke out between Israel and Hamas on October 7 of last year, the oil market has been subject to sharp swings every few months as the conflict evolves. But unless there's a disruption to supply, the move tends to fade, and return to the range where large spare capacity and weak Chinese demand cap the upside, but supply cuts also limit the downside. And that's kept oil in a range of 65 to $85 of the past year, and it's near the low end of that range now.
Look, I don't know what the future holds, as each side in the conflict seeks to position to have the strongest hand in negotiating a ceasefire agreement in both conflicts, but the risk of a major oil shock to the global economy seems pretty small to me. Also, it's worth noting that both developed and emerging market international stocks outperformed U.S. stocks in Q3. So Mike, it doesn't look like investors are seeking to avoid exposures that might be more impacted by further escalation.
MIKE: Well, that's certainly good to hear. While we've been focused on the U.S. election here, you've been talking all year about how many countries have major elections on the calendar in 2024, and the implications those elections may have on economies, on the people in those countries. I think it's not hyperbolic to say on the world order. We've seen major elections this year in France, in Mexico, in India, many others. Japan just had notable elections last week. You've got a new article that just came out on the 2024 elections that have taken place around the world. So what's your big takeaway from looking at how elections have shaken out around the globe this year?
JEFF: Just to reinforce what you said there, it's been a record year. Voters in over 80 nations and territories, representing more than half of the world's population, headed to the polls this year. It was a big year for elections. And I'd say a broad theme that emerged across these elections was that gains were often seen by parties encouraging what I'm calling 'my country first' policies, nationalist policies that may restrict trade, while at the same time touting fiscal deficit and widening spending initiatives, and tax cuts. And these outcomes could have had a negative impact on the markets given the potential impact on growth in inflation, but I've analyzed the impacts of these new governments in Taiwan, and South Korea, and the Netherlands, and Mexico, and India, and the European Union, and the UK, and France, and now in Japan, and even Austria in the last week or so, and in general, we've not seen a change in market trend tied to the election outcome and potential policy changes. The major policy changes proposed by the winners during their campaigns saw little progress towards actual implementation, and that really muted the market impact.
It seems that actual policy may be more often dictated by economic circumstances, rather than the proposals offered by the candidates. And I think a good example might be in the UK. So on July 4, the Labor Party saw a large majority, and ousted the conservatives, yet the potential for sweeping change is highly constrained by the fiscal realities that likely mean little near-term impact on policy and markets. The MSCI United Kingdom Index of UK stocks has produced a total return of 15%, measured in U.S. dollars, so far this year, seemingly unconcerned about the prospect of tighter fiscal policy.
So it may be wise for investors to keep in mind that campaigning bark has often led a little bite in terms of actual policy or market impact.
MIKE: Yeah, Jeff, you know, anyone who has listened to this podcast has heard me on this soapbox all year. The difference between policy proposals and campaign proposals, and actual policy being implemented is often very, very wide. I think we're certainly seeing that in the U.S. election context, where there's lots of proposals by the two candidates that may or may not ever see the light of day―tax policy and lots of other things. And I think the way that that has played out, as you described, around the world, is a good reminder of that. So appreciate that explanation.
Jeff, we've bounced around a number of interconnected topics in this conversation. So let's wrap up here. How are you thinking about the global investing environment right now? Where are you seeing opportunities for investors through the end of the year and maybe into early 2025?
JEFF: Well, let's take a look back before we look forward. In the quarter that just ended, Q3, international stocks outperformed U.S. stocks, and that was due in part to the broadening of market performance beyond the handful of AI-driven U.S. tech stocks that led in the first half of 2024, along with some weakness in the U.S dollar. Those trends may continue in the fourth quarter into next year. Financials, as a sector, they make up almost twice as much of the developed international MSCI EAFE Index as they do the S&P 500®. And so continued strength by rate cut beneficiaries, like financials, may help to sustain international market outperformance. Financials remain our favorite sector and are the best performing sector of the EAFE Index.
When measured in U.S. dollars, you don't have to look too far. In Q3, we saw outperformance by German stocks, French stocks, Italian stocks, Spanish stocks, Japanese stocks, UK stocks, Canada stocks. So an investment in a fund or solution focused on broad international stock market exposure can offer diversification away from a U.S. tech concentration, and not have to worry about picking specific countries or industries, and it's easy to find those on schwab.com.
MIKE: Jeff, really appreciate this conversation today. We touched on a lot of different topics that I think are relevant for investors. So thanks so much for joining me―very grateful for your time.
JEFF: My pleasure, thanks for having me on.
MIKE: That's Jeff Kleintop, chief global investment strategist at Charles Schwab. You can follow him on X, formerly known as Twitter, @JeffreyKleintop. And I really recommend the article that Jeff recently published. It's called "2024 Elections: Big Bark, Little Bite" and you can find it on schwab.com/learn.
Well, that's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks, when we'll be focusing Social Security.
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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.