Market volatility

Your questions about volatility

How does the growing federal debt affect economic growth?

If the federal debt stays on its current trajectory, Schwab expects it to create a significant drag on future growth.

 

When the national debt grows too large relative to the size of the economy, economic growth tends to slow. As things stand now, the debt is on track to rise to unprecedented levels over the next few decades. At the beginning of the year the Congressional Budget Office (CBO) predicted the federal debt would grow from just below 81% of gross domestic product (GDP) at the end of 2020 to 180% of GDP by 2050.¹ That forecast came before the government ramped up spending in response to the coronavirus pandemic, adding nearly $3 trillion to the total national debt over just a few months this spring.² If a second wave of the virus hits, if temporary job losses become permanent, or if further lockdowns are required, the economy could suffer more and federal aid (and debt) may increase.

 

As a result of the growing debt, the CBO has projected that real (inflation-adjusted) GDP will grow at a rate of 1.7% per year over the next 10 years, slightly slower than the June 2019 projections. Over the next two decades, the rate of growth is expected to slow to 1.6%, also slower than the June projections. This does not take into account the effects of the pandemic, which may cause long-lasting effects in certain parts of the economy.

 

¹Source: The 2019 Long-Term Budget Outlook, Congressional Budget Office, 1/2020.

²Source: Treasury Department data as of 5/31/2020.

 

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I’m retiring earlier than I’d planned. How will early retirement affect my Social Security benefits?

You should be aware of two things:

First, you must wait until at least age 62 to start collecting Social Security, unless you fall under a very limited set of exceptions. 

Second, your final benefits may be less than the estimates provided by the Social Security Administration throughout your working life. Those estimates are based on projected lifetime earnings, and assume you will continue working right up until you start collecting Social Security benefits. If you stop working early—say, at age 58—with the expectation that you can hold out until your benefits kick in at age 62, your lifetime earnings will be smaller than projected, which will reduce your Social Security benefits in turn.  

There’s no “correct” claiming age for everybody. If you are 62 and can afford to wait, delaying Social Security generally entitles you to larger benefits. That said, these are difficult economic times and waiting may not be an option for everyone. Just make sure you have a realistic idea of how much Social Security will provide.

Read here for more information on how your retirement age affects your benefits. 
 

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Will the Federal Reserve and government stimulus spending eventually lead to inflation?

Schwab’s view is that the greater near-term threat is deflation, not inflation, and that the risk of inflation in the next few years is limited.

To produce inflation, money has to be loaned and/or spent, and must drive up demand relative to supply—as the adage goes, inflation is “too much money chasing too few goods.” If money sits on the balance sheets of banks or is saved by consumers, then prices for goods and services don’t necessarily rise. 

Right now, demand is down sharply as consumers remain at home. Consumers are also spending less as unemployment continues to rise.

For other reasons why we don’t think inflation is likely—the “output gap,” consumer psychology, the strength of the dollar, and workforce demographics, to name a few—read on.

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How can I take advantage of market volatility as a trading opportunity?

First, make sure you're mentally prepared to manage the risks involved with trading in volatile markets and firm up your trading plan.

Then, focus on stocks trending with the market. Watch for stocks that are breaking through their usual resistance level--when prices are moving rapidly, an upside breakout can be followed by an immediate and substantial run to higher prices. At the same time, a reversal from a false breakout can come very quickly, so consider a stop-loss order to potentially limit your loss in case the price falls a certain distance below the breakout point. (Stop-loss orders can only potentially limit losses because there are no guarantees that stop orders will be executed at or near the stop price.)

Last, consider shorter-term strategies to exit trades quickly--since profits in volatile markets can vanish and turn into losses faster than you expect. For more details on all these strategies, read How Traders Can Take Advantage of Volatile Markets.

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I'm retired. Can I skip taking Required Minimum Distributions (RMDs) this year?

Yes. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, recently passed into law, includes a provision that allows retirees to forgo taking RMDs from IRAs or 401(k)-type plans this year.

For more frequently asked questions about coronavirus-related changes to RMD rules, read Can You Forgo Taking RMDs in 2020?

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