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WashingtonWise Investor: Episode 15


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Amidst a Pandemic, What’s the Prognosis for Global Economies?

The global health crisis is devastating economies around the world. As the countries that first felt the impact, like China and South Korea, begin to see improvements in the health of their populations and their economies, are there lessons for the U.S. recovery?

In this episode of WashingtonWise Investor, Mike is joined by Jeff Kleintop, Schwab’s chief global investment strategist, to discuss the economic impact of the coronavirus pandemic on economies and markets around the globe. They also look at how central banks, especially the U.S. Fed, are working to get their economies back on track, what we can learn from countries that are beginning to come through the crisis, and how emerging markets may lead the way as the world recovers from this recession.

Mike also provides new details on some key elements of the third stimulus package that investors and retirees need to know and considers what we might see in a fourth package. He also explores the implications of the profound disruption of the presidential primary process and whether we could see “virtual conventions” this summer.

WashingtonWise Investor is an original podcast from Charles Schwab.

If you enjoy the show, please leave a rating or review on Apple Podcasts.

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MIKE TOWNSEND: I’ve been thinking a lot recently about the concept of time. Three months ago, we were celebrating the dawn of a new decade, looking back at a 2019 that saw the market gain some 30%. Remember that?

Two months ago, we were getting ready for the Iowa caucuses, where after more than a year of campaigning among more than two dozen candidates, voters were getting their first chance to actually choose the Democratic nominee. South Bend, Indiana, Mayor Pete Buttigieg squeaked out a narrow victory. Remember that?

A month ago, we were talking about the resurrection of former Vice President Joe Biden’s presidential hopes, as he swept to a resounding victory in the South Carolina primary that would upend the course of the campaign and launch him to what appears to be an insurmountable lead for the nomination. Remember that?

All of that seems an incredibly long time ago. Today, the majority of Americans are living under “stay at home” orders. Businesses large and small around the country are shuttered. The markets have been on a wild ride that has seen us enter both a bear market and a bull market—just in the last three weeks. And our health care system is being overrun by the coronavirus pandemic. Time is a very different concept than it was just a few weeks ago.

Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this podcast, we try to help investors sift through the avalanche of news and information to better understand how this unprecedented crisis is affecting the markets.

Today, I am pleased to be joined by Jeffery Kleintop, senior vice president and chief global investment strategist here at Charles Schwab, to discuss how the coronavirus pandemic has affected the global economy and the global markets.

Before I am joined by Jeff, however, let’s take a look at what’s making news right now.

Washington is quiet now, with both the House of Representatives and the Senate in an extended recess. But the past two weeks have seen astonishing action, with the two parties coming together to pass the largest rescue bill in the nation’s history. Both the House and Senate last week unanimously approved the Coronavirus Aid, Relief, and Economic Stability Act, better known as the CARES Act. The $2.2 trillion rescue package came together after 10 days of intense negotiations led by Treasury Secretary Steven Mnuchin and Senate Minority Leader Charles Schumer of New York.

It is hard to overstate just how unusual this process was in Congress, especially considering the two parties were in the midst of a highly partisan impeachment trial just two months ago. The Senate was able to pass the package 96 to zero, while the House took the highly unusual step of passing the bill by voice vote—something I have never seen happen for anything but the most routine of procedural matters. They did this in order to reduce the number of members of Congress who had to be physically in Washington.

Most everyone is by now aware of the major details of the bill, from the $1,200 checks that will be sent to every adult earning less than $75,000 to a massive aid program for small businesses to a sweeping expansion of unemployment benefits to aid for large businesses, states, municipalities, hospitals, and other health care providers.

But beyond those critically important elements, there are a couple of very important provisions in the new law related to retirement savings that everyone should know about. I mentioned them on last week’s podcast, but I want to revisit them because we have some additional detail now that the bill has been finalized.

First, all required minimum distributions from retirement accounts have been waived for 2020. This applies to all retirees, regardless of age. And it applies to all types of retirement accounts, including IRAs, inherited IRAs, and defined contribution plans like a 401(k). One of the issues this provision addresses is that it means retirees do not have to make a withdrawal in a down market. Since required minimum distributions for this year were to have been based on the value of the account at the end of 2019, and most accounts have seen significant losses in 2020, that required withdrawal would have been a much larger percentage of one’s account than was intended. Now, that problem is removed because the requirement to take a withdrawal has been eliminated.

Of course, retirees who need to withdraw money from their retirement account for living expenses can still do so—the change just means you are not required to withdraw anything.

Now, one of the frequent questions I have been getting is, well, what if I already took my required distribution earlier this year? Well, if you took your distribution in the last 60 days, you are allowed to roll it back into your account. But if you took it more than 60 days ago—say, in early January—then the new law is not crystal clear about what steps you can take. This is one of a number of questions that we expect the IRS to address when it releases guidance about the new law in the coming weeks. And this is not unusual. Whenever Congress writes a new law, it doesn’t address every situation specifically. The relevant regulatory agency—in this case, the IRS—will create guidance and rules to interpret the new law. That’s what we’re waiting for now, and we expect the IRS will release that guidance quickly, but we don’t know exactly when.

The second important provision to know about is that the new law allows for a special “hardship withdrawal” from your retirement account if you have been impacted by the coronavirus. Typically, if you are younger than 59½ and you make a withdrawal from your retirement account, you have to pay a 10% penalty. The new law waives the penalty. Anyone, at any age, may withdraw up to $100,000 from his or her account to help reduce the impact of the coronavirus pandemic.

You still have to pay income taxes on that withdrawal. However, you can spread those taxes out over three years. And you have three years to repay the amount that you withdrew back to your account—at which time you can file an amended tax return and get the taxes you paid on that withdrawal back as a refund.

Now, to be clear, making a withdrawal from your retirement savings should be a last resort, and individuals should look first at other sources of money to weather this crisis. But it’s good to know that this option is available if you need it, and your financial advisor can help you navigate the new rules around this type of withdrawal.

Finally, now that Congress has approved the CARES Act, the third coronavirus response bill it has passed since the beginning of March, attention is already turning in the Capitol to a “phase four” bill. Even as Congress stays at home, key leaders are in Washington overseeing staff efforts to draft the next stimulus bill, which could move forward as quickly as late April. Right now, there’s a laundry list of ideas about what might be included in that bill—from another round of direct payments to Americans, to a further increase in unemployment benefits, to more money for states and localities.

But another thing that’s gaining momentum in Washington is including a major infrastructure initiative in a potential “phase four” bill. Some leaders see an infrastructure investment as a way to get Americans working again—and it would have the advantage of being mostly outside, where it’s easier to keep a social distance. There has long been bipartisan agreement in Washington that there is a pressing need for a major investment in the nation’s roads and bridges and the like. So don’t be surprised if the infrastructure idea continues to gain momentum in the coming weeks.

Of course, development of this “phase four” bill is at the earliest stages at this point, so it’s hard to know what exactly will be in it—and a big question will be the course the pandemic takes in the next few weeks. That will be the deciding factor on whether the next bill focuses mostly on immediate needs or begins to look ahead to a reopening of the American economy.

As to the timing of that next round of stimulus, the Senate has announced that it will not return to Washington until April 20, and the House will remain in recess at least that long. But both chambers have said that they would return sooner than that if the crisis requires faster action.

On my Deeper Dive this week, I want to take a look beyond our borders and see how the pandemic is affecting the global economy and world markets. Joining me to provide his perspective is Jeffrey Kleintop, chief global investment strategist here at Schwab.

Jeff, welcome back to the podcast. Thanks so much for being here.

JEFF KLEINTOP: Thanks Mike. It’s always a privilege to be here with you.

MIKE: Well Jeff, you are constantly watching the markets across the world and if there is one thing that this pandemic has done, it’s to put a fine point on just how incredibly connected we are in this global economy. So let’s begin today at the source of the virus—China, where it took a devastating toll on Wuhan in Hubei province. The number of cases outside of Hubei province has been amazingly small, which suggests that China was able to contain the virus with a total lockdown of Hubei. That ban is just being lifted after 2.5 months. So what has been the economic impact on China?

JEFF: China’s peak in new virus cases was in early February, so it’s been two months, and we’ve seen economic data go into what I call “limbo.” Now not limbo as in we’re still waiting for it, but limbo as in “how low it can go.”

The composite Purchasing Managers’ Index for China, a widely watched measure of business sentiment, fell to its lowest ever reading for February. And the Economic Surprise Index, which measures how economic data is faring relative to economists’ expectations, plunged to levels I didn’t even think were possible.

MIKE: So after that bottoming out, is China getting back to work?

JEFF: Well the virus impact has been deep, but it has been brief. Economic indicators we can measure daily—or even hourly—like road traffic, air pollution, and port activity have all picked up. And early official monthly data reports for March seem to support these signs of recovery. For example, last week’s data on Korean exports for March showed a monthly rebound of over 50% in goods sent to China. And the Purchasing Managers’ Index reading for March sharply rebounded after February’s decline.

MIKE: So how long will it take to return to normal?

JEFF: Well, that probably depends on the rest of the world. As the shutdowns migrated from Asia to Europe and the U.S., we can see that same impact in the economic data. The virus outbreak peaked in China in early February, accompanied by a big hit to GDP for the first quarter of this year. With the outbreaks in Europe and the U.S. accelerating as we move into the second quarter, the change in GDP for the second quarter is likely to be deeply negative in both Europe and the U.S., even as Asia sees some improvement from the first quarter. However, any second quarter recovery in Asia may be limited by the spread of recession to the rest of the world.

So the shape of the recovery in the global economy may depend on how long it takes until people feel comfortable leaving their homes again, which isn’t really expected until we see a drop in new virus cases in the western hemisphere. The longer it takes, and the more jobs and businesses are lost, the more difficult the recovery. Early signs in Asia are of a V-shaped rebound—but that could instead end up looking like a square root, with the V-shape flattening out as weaker growth elsewhere saps Asian economic momentum in the second quarter. And that may delay the potential for a broader recovery into the second half of the year.

MIKE: Well, it’s a long period of downtime in China. How has that impacted American businesses?

JEFF: Supply chain delays really hit in February with the China shutdown, but with the drop in demand from consumers in March, most businesses aren’t too worried about product shortages, well, outside of health care supplies. The upturn in China in March has been a benefit to some U.S.-based companies. Just as an example, last week Nike reported surprisingly strong order growth in China.

MIKE: So things are slowly turning around in China. Let’s move over to Europe where the magnitude of the crisis seems to be on a different scale in different countries. And they’re handling the crisis in various ways. We’ve heard about the steep toll it is taking in Italy and Spain, but Germany seems to be turning a corner. So when you are assessing the economic impact, do you tend to look at it country by country, or do you take Europe as a whole because of how inter-related the countries are?

JEFF: Europe’s nations are more interconnected than they pretend to be. We’ve yet to see a peak in cases in Europe, as a whole. Italy’s seeing the worst virus impact with 25 times the number of deaths than Germany from COVID-19, but Germany is dependent upon sales for its goods like cars outside the country, so the worsening of the virus impact in the rest of Europe and the U.S. does matter.

MIKE: Well, Jeff, in our last episode of WashingtonWise Investor, we did a deep dive into the U.S. stimulus bill with Liz Ann Sonders. We’re talking about $2 trillion dollars being pumped into our economy. But realistically, there’s no way that countries like Spain and Italy can do something along those lines. So what can they do to put their economies back on track?

JEFF: The stimulus itself isn’t going to turn around the economy. As you know, this is a health crisis and only an improvement in the battle against the virus will make people feel safe leaving their homes again. And when that time comes, if we’ve avoided mass layoffs and bankruptcies, the rebound can unfold.

Europe has suspended budget rules, and it’s putting stimulus in place, but it does have political challenges in coordinating massive stimulus across borders. But it’s important to remember that Europe has more of a pre-existing social safety net than the U.S. does, in the form of health care and unemployment benefits. Many of the types of things that the U.S. has just recently tried to assemble. And that’s led to structurally slower growth in Europe than the U.S. over the long-term, but it may help buffer the short-term fallout on consumers now. And we can see that in the last global recession as an example. In ’08 and ’09’s Great Recession, German unemployment only went up from 7.6% to 8.3%—that’s not much of a rise—but it went from 4.5% to 10% in the U.S in contrast.

MIKE: Well the Fed has taken a number of steps, from lowering interest rates to buying up Treasuries and mortgage-backed securities. They also coordinated with other central banks to lower the cost of obtaining U.S. dollars abroad so that overseas borrowers have access to those dollars to reduce some of the stress in the system. Is there anything in the latest stimulus bill that is helpful to other economies? And is there anything more that we can work on with the other central banks?

JEFF: Mike, I think you are right. I think the most important thing that the Fed did was to establish dollar swap lines to ease the global dollar shortage. Businesses around the world buy materials and often have sales denominated in dollars, so with so many businesses worried about their funding of their operations, they’ve been seeking dollars, which created a shortage. The Fed lending dollars to other central banks has helped lift that shortage and seems to be working since the dollar has reversed much of the surge that it had put in place ahead of the action. Other central banks are addressing QE more aggressively than the U.S. Fed—in part, since they’d rather not cut rates further into negative territory.

But again, this is a health crisis, not a financial one. So all the central banks can do is be sure it doesn’t turn into a financial crisis as well. They can’t really solve the problem. And I am glad to see the market really didn’t rally too far solely on Fed actions—I think that would risk some disappointment.

So keep an eye on the dollar as a gauge of global financial stress. If it surges back up again, that’s a bad sign. So far, that’s being managed effectively. But the U.S. and China haven’t established swap lines for probably political reasons, and the two largest economies in the world not working together is a risk.

MIKE: Well, that’s great advice—to keep an eye on the dollar as kind of a bellwether as to how things are unfolding around the globe. Well, Jeff, through all of this, markets around the globe have remained open. I know when I check my own portfolio, where I have a pretty broad mix of ETFs—or exchange-traded funds—it’s the international holdings that are taking the worst pummeling. So how are internationally focused stocks, ETFs, and mutual funds performing, relative to the U.S. market?

JEFF: I’m glad you brought up ETFs because I think what’s happening there is going to be one of those topics that will have a lot of people talking after the bear market is over because it’s surprising to so many. You know, in recent years, the rising popularity of passive investing—it’s a strategy that just tracks a market index—it’s brought criticism that the strategy could amplify market momentum during the next downturn. In part, the concerns were motivated by a perception that individuals are quick to sell when returns suffer, and passive equity index ETFs may be forced to sell in periods of stress, when liquidity is poor, and that could worsen the market downturn.

But here’s the thing: That’s not what’s happening, despite the fastest bear market in history. Surprising many, equity index ETFs saw solid net inflows during March as the bear market took hold, according to daily ETF data tracked by Bloomberg. Predominantly, these flows have been into the broad, unlevered ETFs, which tend to be favored by long-term individual investors. Now, obviously there’s selling taking place among traders and institutions and computer algorithms, and even companies have backed off on their share buybacks. So the rise of passive investing doesn’t appear to be fueling the downturn—in fact, the opposite appears to be the case, as these investors act as a stabilizing force. I think that’s an interesting and untold story that we’ll hear more about.

But to answer your question, some markets have suffered more than others—Europe has underperformed Asia, for example. But since U.S. stocks peaked on February 19, there’s really no material difference in the performance of U.S. and international stocks measured by the MSCI EAFE Index—they’ve tracked very closely, even during the wild daily moves.

MIKE: Well, you know, it can be hard and it can be counterintuitive, but sometimes it’s just when things are the scariest that it can be the best time to make a bold move. So do you see potential opportunities to invest in particular areas right now?

JEFF: Well, with China and South Korea leading the economic recovery, it’s probably not too surprising that emerging market stocks are outperforming developed stock markets since early February, when the peak in new COVID cases in China occurred. It’s not uncommon for emerging market stocks to lead the rebounds from bear markets. They did that during the global recessions of 2000 to 2002 and ’08 and ’09.

During the global recession back in 2000 to 2002, emerging market stocks bottomed back in  September of ’01—that was well before U.S. and other developed markets, which bottomed over a year later. And similarly, during the ’08-’09 global recession, emerging market stocks bottomed in October of ’08—that was well before U.S. and other developed markets bottomed in March of 2009, about six months later.

So will emerging market stocks, led by China, again lead the world equity rebound from the current bear market and recession? It’s possible, but there are some headwinds for EM stocks to overcome. Commodity-driven companies make up about 10% of the emerging market equity market cap. And they’ll have to find a way to get past the drag from commodity prices—affected by weak demand and the increase in the supply of oil from OPEC—and a stronger U.S. dollar.

MIKE: As you watch countries that started to experience the crisis before the U.S, is there anything we can take away from how and when they get back to work and their economies start to make headway?

JEFF: In China, cases peaked two weeks after the lockdown, and then one week later the government started encouraging companies to return to work. Over a week ago now, maybe it was two weeks ago now, FedEx reported 90-95% of large manufacturers in China and 65-70% of small businesses were back operating again, but probably not at full capacity. It’s now been about six weeks after the Wuhan lockdown. The public has emerged from hibernation, with traffic congestion back up again and stores reopened. But we don’t often think about trust and transparency when we think of China—but trust and transparency about the spread of the coronavirus, once the short-comings in Wuhan were revealed, led the public to resume relatively normal behavior just weeks after they saw the sharp decline in new cases.

Now, such a rapid economic snapback in Europe or the U.S. may seem like wishful thinking, and so it’s not surprising that a lot of people may feel like everything is going to be changed for the long term. But I remember after 9/11, there were those saying no one would ever fly again—but air travel began to rebound right away. I’m optimistic that we will recover from this shock—probably not as fast as China did—but in a way that may surprise some people.

MIKE: Well, it’s great to end on a little bit of optimism, Jeff. Thanks so much for joining me today.

JEFF: Thanks so much for having me, Mike.

MIKE: That was Jeff Kleintop, chief global investment strategist here at Charles Schwab.

On my Election 2020 update, the presidential primary process, like so many other aspects of life today, has been thrown into chaos by the coronavirus outbreak. Thirteen states and the District of Columbia have now postponed primaries that were scheduled for late March, April, and May. Several states are in the process of turning their in-person primaries into all mail-in ballots, though there are concerns about the logistics of that and whether it will disenfranchise some voters.

June 2 is now shaping up as a kind of second Super Tuesday. What was originally supposed to be the final Tuesday of the primary season, with four states and the District of Columbia wrapping up the voting, has now grown to 10 states plus D.C.—and there are concerns that even that date may be impossible for voters to get to the polls. And three states are scheduled to vote even later in June, including New York, which just moved its primary from April 28 to June 23.

The new schedule is creating a host of logistical headaches for states and for the Democratic Party. Will states be able to get enough poll workers willing to work amidst uncertain conditions and potential crowding? Will voters be willing to go to the polls? A study released this week by the Pew Research Center found that 66% of respondents said they would be uncomfortable going to their polling place right now. How would states handle it if they had to switch to an all-mail balloting process? And how will the remaining candidates, former Vice President Biden and Vermont Senator Bernie Sanders, get their message to the voters without holding campaign events or having armies of volunteers knock on doors?

There are also some practical concerns—Democratic Party rules require all primaries to be completed by June 9. States that vote after that date will have their delegates to the convention reduced. But three states—Louisiana, Kentucky, and New York—have already moved their primaries to a date that is later than June 9. It remains to be seen whether the party changes its rules to accommodate these extraordinary circumstances.

And the other question looming over the presidential election process is what to do about the conventions themselves. The Democratic National Convention is scheduled for July 13-16 in Milwaukee, Wisconsin. But no one knows now whether having a gathering of tens of thousands of people will be possible in July. So the convention leadership is rapidly planning for the possibility of something else unprecedented—a virtual convention. It’s something that’s never been tried in the modern era. But it’s just another entry on the long list of ways we are all learning to adapt to the outbreak.

That’s all for this episode of Washington Wise Investor. Please take a moment to subscribe so you don’t miss an episode. And if you like what you’ve heard, please leave us a rating or a review on Apple Podcasts or your favorite listening app—those ratings and reviews really do matter.

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

I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and most importantly, stay home—and keep investing wisely.

Important Disclosures

The policy analysis provided by Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Supporting documentation on statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

All corporate names and sectors are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.


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