Your frequently asked questions about the markets

1. Is 1970s-style inflation coming back?

From Kathy Jones, Chief Fixed Income Strategist:

• The degree of inflation risk depends on the time period:
  • Next few months: Inflation has surged due to a combination of shortages of some goods and strong demand as the economy rebounds from the COVID-19 crisis. Inflation is likely to remain high for the next few months.
  • Next one to two years: Inflation is likely to revert to lower levels as supply catches up with demand. Wage increases will likely slow as the unemployed re-enter the labor force, while price increases for goods should ease as inventories rise. 
  • Next two to five years: Inflation could be more persistent due to supply bottlenecks, raising the risk that monetary policy might have to tighten more than anticipated.
• We don’t expect 1970s-style inflation. However, it has been over a decade since the U.S. had a consistent inflation reading of 3% or higher and markets do not currently appear priced for that potential development. 

For a more complete analysis, read:

• Is 1970s-Style Inflation Coming Back?
• Bond Market Blues: High Inflation and Low Yields
• Inflation: Persistently Transitory

2. When will the Federal Reserve raise interest rates?

From Kathy Jones, Chief Fixed Income Strategist:

• The Federal Reserve is likely to raise its benchmark interest rate at its March meeting. Markets are currently pricing in a total of four rate hikes this year, with an additional two to three hikes priced in for 2023.
• The Fed is expected to end its monthly bond purchases by March. Once the purchases are over, the next steps would be to raise rates and then begin to reduce the size of its balance sheet. The Fed will likely allow bonds to simply roll off its balance sheet, rather than actively sell its holdings.
• The Fed will seek a balance when hiking rates—enough to slow the rate of inflation while not tightening financial conditions so much that economic growth suffers.

For a more complete analysis, read: The Fed’s Policy Tightening Plan: A One-Two Punch.

3. With the risks in China, is it time to buy or sell Chinese stocks?

From Jeffrey Kleintop, Chief Global Investment Strategist:

• China’s economy is slowing due to domestic headwinds from a slowing property market, consumer caution in the face of a policy to quickly contain COVID outbreaks with potentially strict lockdowns, and the continued economic transition to achieve “common prosperity.” 
• We believe a lot of downside risks have been discounted in Chinese (and therefore emerging-market) stocks and an easing of any of these trends could result in equities rallying. The higher the downside risk to growth, the better the chance of increased stimulus. In contrast to the global trend, consumer price inflation in China is tempered, rising only around 2%. This gives room for monetary stimulus, contrasting with the tightening trend globally. 
• Historically there is a bear market nearly every year in Chinese stocks (17 of the past 20 years), usually driven by some policy issue. Historically, investors have tended to be compensated for this heightened volatility with double digit annualized total returns over 10-year periods. 

4. Do rising geopolitical tensions pose a significant threat to stocks?

From Jeffrey Kleintop, Chief Global Investment Strategist:

• The potential always exists for a geopolitical event to draw the U.S. or other major nations into armed conflict. While the events are often unpredictable and the countries involved vary, the markets’ reactions are often predictable. The global market responses to threats of armed conflict between nations have tended to be both broad-based and short-lived, averaging declines of 3% over an average of seven days for 37 events since 1980. During periods of economic recovery and growth, the effects were more muted than during recessionary periods.
• Despite concerns, an invasion of Taiwan by China is unlikely, as China imports more in semiconductors than oil, largely from Taiwan. So an invasion would bring Chinese industry to a halt and might invoke a sympathetic backlash in other territories and may bring global military action. As for Taiwan, it is unlikely to make moves toward independence that would provoke China. A June 2021 survey conducted by Taiwan’s National Chengchi University showed that only 31% support independence—not enough to empower Taiwan’s leaders to break away from China.
• A long history of geopolitical developments shows holding a well-diversified portfolio may buffer against potential short-term market moves. Investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans.

5. What are SPACs, and do they represent a risk to the market?

From Liz Ann Sonders, Chief Investment Strategist, and Kevin Gordon, Senior Investment Research Specialist:

• Special purpose acquisition companies (SPACs) are public investment vehicles that bring private companies public via a merger. With a two-year limit to do so, SPACs offer an alternate—and generally less expensive—path to the public markets vs. a traditional initial public offering (IPO).
• Although SPACs have been around for decades, their numbers have grown considerably over the past couple of years. Many celebrities, ex-hedge fund managers, and former corporate executives have launched their own SPACs, stirring up concern that speculation is heating up, posing a risk for the market.
• While SPACs do carry their own set of unique risks and have seen some weaker performance since the beginning of the year, their weakness hasn’t spilled over into the broader market. For now, this is alleviating some concerns that the current market is reminiscent of the tech boom in the late 1990s and subsequent bust in the early 2000s.

For a more complete analysis, read: SPACs: What Investors Should Know Now.

6. Should I own Bitcoin?

From Randy Frederick, Managing Director, Trading and Derivatives, and Rob Williams, Managing Director, Financial Planning, Retirement Income, and Wealth Management:

• Schwab does not currently use or recommend Bitcoin in Schwab model portfolios. We view cryptocurrencies as volatile, high-risk vehicles, and any ownership should be done with money outside a traditional portfolio.
• Bitcoin doesn’t currently fit within traditional asset allocation models, as it is neither a traditional commodity nor a traditional currency. Bitcoin doesn’t have earnings or revenues. Its price has been driven primarily by supply and demand, not inherent value. 
• Clients seeking cryptocurrency exposure have a few ways to do so at Schwab, though prices for many of these products can be dramatically different from underlying cryptocurrency values, and may of them have high operating expense ratios:
  • Clients can trade certain over-the-counter (OTC) trust products, such as Grayscale’s Litecoin (LTCN), Ethereum (ETHE, ETCG) and Bitcoin (GBTC, BCHG) products. 
  • Clients with a futures account can trade the CME Bitcoin futures product (BTC). 
  • Clients can trade ETFs or mutual funds that provide indirect exposure to the cryptocurrency markets through crypto futures contracts, or through the stocks of companies participating in cryptocurrency and blockchain activities. Some examples include the ProShares Bitcoin Strategy ETF (BITO), the Valkyrie Bitcoin Strategy ETF Trust (BTF), the ProFunds Bitcoin Strategy Fund (BTCFX), the Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF (BLKC), and the GlobalX Blockchain ETF (BKCH).
  • Clients can gain indirect exposure to the cryptocurrency markets by investing in companies that have disclosed direct ownership interests in digital assets. Some examples include Coinbase (COIN), Silvergate Capital (SI), MicroStrategy (MSTR), Square (SQ), PayPal (PYPL), and Riot Blockchain (RIOT).

For a more complete analysis, read: 

• Cryptocurrencies: What Are They?
• Cryptocurrencies: Should You Invest in Them?
• Cryptocurrencies: How You Could Invest in Them
• Cryptocurrency Investing

7. What are the key policy initiatives to watch on Capitol Hill as we head into 2022?

From Michael Townsend, Managing Director, Legislative and Regulatory Affairs:

• A flurry of activity on Capitol Hill in the final weeks of 2021 focused on four big issues:
  • Passage of the $1 trillion bipartisan infrastructure bill, which was signed into law November 15. The White House anticipates “first shovels in the ground” by late in the first quarter of 2022.
  • Passage of a temporary measure to fund federal government operations through February 18, 2022. Congress has not passed any of the 12 appropriations bills that provide annual funding for all federal agencies and programs. Lawmakers will have to do that by the February deadline or approve another short-term extension of funding.
  • Passage of legislation to raise the debt ceiling by $2.5 trillion - enough to ensure that there is no threat of the U.S. defaulting on its debts in 2022. Congress will have to deal with the issue again in early 2023.
  • House passage of the $2 trillion “Build Back Better Act, a spending package focused on climate change and strengthening the social safety net. The Senate was still wrestling with a number of issues in mid-December, so debate in that chamber has yet to begin. If/when the Senate passes the bill, it will have to go back to the House for a final vote. While Democrats hope to pass the bill before the end of the year, it is likely the bill will not be resolved until early 2022. 
  • A final issue to watch is the president’s nominations for three open (or soon-to-be-open) seats on the Federal Reserve Board of Governors. With the renomination of Chair Jerome Powell to a second four-year term, the elevation of sitting Governor Lael Brainard to vice chair, and the nominating of the three new members, there will need to be five confirmation votes in the Senate in early 2022 to get the board to full strength – at a time when the spotlight on the Fed is particularly bright given rising inflation and other volatile economic data.

8. What will happen to tax policy under the Biden administration?

From Michael Townsend, Managing Director, Legislative and Regulatory Affairs:

• Tax increases have been a moving target. Proposals from earlier this fall to increase the corporate tax rate, increase the top individual income tax rate, increase the top capital gains tax rate and reduce the amount of inherited assets that are exempt from the estate tax have all been scrapped.
• The current iteration of the “Build Back Better Act” calls for these tax changes:
  • A minimum corporate tax rate of 15%;
  • A 1% tax on stock buybacks;
  • A new 5% tax on adjusted gross income above $10 million, and an additional 3% surtax on adjusted gross income above $25 million;
  • An increase in the state and local tax (SALT) deduction to $80,000;  and
  • Changes to retirement savings, including a prohibition on “backdoor” Roth conversions beginning in 2022, and new rules for individuals with more than $10 million in retirement assets that would prohibit contributions and require minimum distributions of a portion of the excess amount, beginning in 2029.
• The House passed the bill with these provisions in November, but the bill is expected to be modified by the Senate. The tax provision most likely to change in the Senate is the SALT deduction number, which many Senate Democrats feel is too generous. No compromise on the SALT deduction had been agreed to as of mid-December, but negotiations are ongoing.

9. Is the traditional 60% stocks/40% bonds portfolio “dead”?

From Kathy Jones, Chief Fixed Income Strategist:

• No. However, the 60/40 portfolio is not right for everyone, nor has it ever been. Your appropriate allocation depends on your individual financial goals and plan, as well as your risk tolerance (how much you can handle emotionally) and risk capacity (how much you can afford to lose). 
• That said, some investors recently have expressed concern about the 60/40 portfolio model. They fear that if the stock market should decline, bond yields are currently so low that there isn’t much room for bond prices to rise or bond yields to fall further. 
• Also, stocks and bonds moved in tandem briefly in spring 2020, which was unnerving to investors who look to bonds to provide diversification from stocks. However, this was largely a liquidity-driven event and lasted only a few days. It was addressed quickly by the Federal Reserve increasing liquidity in the markets. 
• We expect bonds to continue to provide capital preservation and diversification from stocks during periods of market volatility. Bonds tend to provide diversification from stocks when it’s most important—when stocks are falling sharply. 
• It’s important to distinguish between correlation and performance. We don’t expect strong returns from the bond market because starting yields are so low. Nevertheless, bonds are still appropriate in a portfolio because they provide capital preservation, diversification from stocks, and income.

10. Where is the U.S. dollar headed, and could it lose its status as the reserve currency?

From Kathy Jones, Chief Fixed Income Strategist:

• The U.S. dollar has rebounded since May 2021. We expect the dollar to remain firm or appreciate moderately as long as the Federal Reserve is moving toward tightening policy while other central banks are moving more slowly. 
• Longer term, the U.S. faces the need to finance large and rising external deficits, which could weigh on the dollar.
• However, we expect the dollar to remain the world’s reserve currency for the foreseeable future, mainly because there is no obvious alternative. Although the euro and China’s currency are contenders, both have limitations.

For a more complete analysis, read: Will the U.S. Dollar Lose its Reserve Status?

11. What should investors do if they're transitioning to and need income in retirement? 

From Rob Williams, Managing Director, Financial Planning, Retirement Income:

• As you approach retirement, start by estimating how much money you’ll need from savings in the first four to five years of retirement.
• Aim to have the amount of money you’ll need from savings after other income sources (rental income, part-time work, etc.) for the next year in a bank account and then allocate two to four years’ worth of savings needed in high-quality short-term bonds or bond funds within your portfolio.
• Then, stay invested in stocks and other investments based on your goals and risk tolerance.
• Don’t fixate on yield. We suggest clients use multiple sources of return and their whole portfolio, not limiting themselves to investment income.
• As you near retirement, create a more detailed budget, work with a planner to create or update a more detailed income plan, and plan when to start Social Security.
• Consider low-cost guaranteed income sources, such as a fixed immediate annuity, in addition to your portfolio. This type of guaranteed income source may be especially appropriate if you are in good health and: 
  • worried about market risk
  • concerned your savings won’t last
  • concerned you won’t create a steady paycheck by investing and distributing from your portfolio alone.