Your frequently asked questions about volatility

Text FAQs

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.

 

(0620-01M1)

 

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. 
 

(0520-0MSN)

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.

(0520-0F7W)

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.

(0420-025Y)

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?

(0420-02W4)

Where can I hold my cash when markets are volatile?

It depends on how you plan to use the cash. There are two primary categories: (1) everyday cash and (2) savings and investment cash.

• Everyday cash is money that is needed for day-to-day expenses, paying bills and quickly placing trades. Typically ease of access is of top importance. You can consider holding this money in a checking account or in the uninvested part of a brokerage account.
• Savings and investment cash is money that is needed for an emergency fund (3 to 6 months-worth of expenses), short-term goals and/or as a long-term investment in a diversified portfolio. A competitive return (yield) may be more important than cash management features or immediate access. Options include a high-yield savings account, purchased money funds or certificates of deposit (CDs).

For more information, read Where Should You Hold Your Cash?

(0420-0X8K)

Which sectors of the market would you consider investing in right now?

Currently, we find the health care sector to be the most attractive equity sector, and think it’s likely to outperform the overall market. But we advise keeping your portfolio well-diversified, with perhaps a slight overweight to the health care sector at this time.

The health care sector has many long-term positives, including an aging global population and growing middle class in emerging markets, all of whom will demand more extensive drug treatments and medical care over time. The durability of health care sector earnings also tends to lead to outperformance during periods of economic weakness. Even with the strong relative performance recently, the current discount to the overall market in numerous valuation metrics remains comparatively attractive.

On the other hand, the upcoming U.S. presidential election has increased risk for the sector due to calls for pharmaceutical pricing controls and a single-payer health care system. But the former is probably already priced in. And the latter is unlikely, as we believe chances of a Democratic sweep of the White House and both houses of Congress are low. Even if a sweep were to occur, there isn’t currently broad-based support for a single-payer system, even within the Democratic Party.

Keep in mind that our views can change at any time. For our most current views on all equity sectors, visit Sector Views.

(0320-0JKP)

Given the big drop in oil prices, what is your take on the oil and gas industry?

Assessing the oil and gas industry is very difficult at this time, as the sharp drop in the price of oil (the primary driver of oil and gas stocks) is both a supply and demand problem.

On the supply side, Saudi Arabia recently announced plans to dramatically increase the supply of oil on the market, with the intent to drive out higher-cost producers. On the demand side, COVID-19 containment efforts have the potential to dramatically reduce oil and gas consumption, which was already weak due to slow global growth. The longer this persists, the more problematic high levels of debt in the sector could become.

Clearly, the poor macroeconomic environment and fundamentals for oil and gas companies are a strong headwind. But the peak in COVID-19 and reversal by Saudi Arabia could happen at any time. In that case, valuations may become relatively attractive. Bottom line, this mix of highly uncertain factors leaves us neutral on the sector at this time.

Keep in mind that our views can change at any time. For our most current views on all equity sectors, visit Sector Views.

(0320-0JKP)

Can the US government buy stocks to boost the market?

No. The government can’t currently buy stock in public companies. But the Federal Reserve can buy U.S. Treasury bonds and mortgage-backed securities issued by government-backed entities, like Fannie Mae and Freddie Mac. Expanding the types of securities the Fed can buy would require a change in the current law by Congress.

Some central banks around the globe, notably the Bank of Japan, have purchased stock, usually via exchange-traded funds (ETFs). This raises several conflict-of-interest issues by giving the government a partial (and potentially controlling) stake in private companies. It also puts the government in the position of picking winners and losers, based on how it invests.

Does the COVID-19 pandemic and its economic impact warrant revisiting the long-standing policy that prohibits the U.S. government from investing in public companies?  Some say we should reconsider it. And the economic stimulus bill currently moving through Congress has provisions that could give the government a stake in companies that use government-backed loan programs during the crisis.

(0320-0JKP)

I need to take money out of my portfolio to cover expenses soon. How can I make selling assets in this down market as painless as possible?

Before you sell, have a plan that takes into account how transactions in today’s market could affect your goals and portfolio long-term. If you’re in or near retirement, this includes strategies to help protect against sequence-of-returns risk (the risk of permanently harming your portfolio’s potential growth due to large withdrawals in a down market).

One way to decide which investments to sell is to rebalance your portfolio. By selling overweight positions and buying underweight ones, you may be able to reset your target asset allocation and generate cash at the same time. You can also sell investments you don’t expect to perform well.

If your portfolio is already balanced or you need to generate more cash, consider two more things. First, if you plan to sell assets for a gain, consider selling those you’ve held for a year or more to take advantage of long-term capital gains tax rates (which are usually lower than ordinary income tax rates on short-term capital gains). Second, if you’re selling assets for a loss, remember that you can use those losses to offset gains.

For more information, read When You Have to Sell in a Down Market: How to Make the Best of a Bad Situation.

(0320-0J0X)

How does it help the economy when the Fed lowers interest rates?

Lowering the cost of borrowing makes it easier for consumers to buy houses, cars, and other goods. Since consumer spending accounts for about 70% of economic activity, lowering rates to encourage consumption should help boost the economy. Lower interest rates also help businesses by reducing the cost of capital.

Businesses typically use bank loans or short-term borrowing to pay rent, meet payroll, and finance day-to-day activity. For businesses that issue bonds, lower rates may also help reduce the financing costs of long-term projects, like investing in new equipment or financing a new building.

(0320-0DKC)

Is there any safe place to put my money that will generate a decent yield?

In general, higher yields require more risk. The safest investments are Treasury securities and FDIC-insured bank CDs. These investments are considered risk-free, but their yields are very low because the Federal Reserve has reduced its base lending rate to near zero. An investor looking for a higher yield will need to take on duration risk (potential drop or increase in value as interest rates change), credit risk, or both. This means buying a longer-term Treasury security, or a corporate or municipal bond.

Right now, 10-year Treasury yields are under 1%, which probably isn’t high enough to warrant the duration risk for most investors. Corporate bond yields are higher, but in an economic downturn or recession, the risk that the issuer might default on the bond also rises. Municipal bonds may provide somewhat higher after-tax yields for investors in higher tax brackets, but it depends on the maturity and credit worthiness of the issuer.

(0320-0CFB)

I’m at retirement age. I don’t need the money in my portfolio right now, but I will soon. Given the current volatile market, how can I prepare my portfolio for future spending needs?

Determine when you may need to take withdrawals from your retirement portfolio, and how much you’ll need to take out. If you’ll need withdrawals to fund spending within the next four years, consider selling some of your appreciated investments and allocating the amount you’ll need from your portfolio over the next four years to cash investments and short-term bonds or funds.

For more information, read Investing for Income in Retirement.

(0320-06Y3)

Would you recommend municipal bonds as a defensive asset right now? 

Yes. Historically, investment grade municipal bonds have had a negative correlation—or an inverse relationship—with the stock market and very low defaults rates. So they’re considered defensive assets. In this particular market environment, some municipal bonds haven't performed as usual, with prices falling and yields spiking up. Much of that has to do with the lack of liquidity in markets and extreme flight to safety-buying, which has pushed short-term treasury yields down to zero or into negative territory.

In the long run, we still consider highly-rated municipal bonds to be defensive assets. Periods of extreme stress can cause dislocations in the markets, and this is one of those times. But we don't expect it to last over the long run.

For more information, read Coronavirus Fears Affect the Municipal Bond Market.

(0320-06TY)

Will we see negative interest rates in the next 12 months?

We doubt the Federal Reserve will lower the federal funds rate (the rate at which banks lend to each other) into negative territory because the Fed has indicated several times that it doesn’t see that as an “appropriate” policy tool.

However, we’ve already seen negative T-bill rates for very short-term maturities. The driver behind the drop in Treasury bill rates below zero was safe-haven buying, as investors moved to cash from other asset classes.

For more information, read Could Negative Bond Yields Come to America?

(0320-06YP)

What catalyst would cause the stock market to rally?

A stabilization and eventual decline in the number of COVID-19 cases (in both Europe and the United States) would likely calm investors’ fears and provide a boost to the market, as would a vaccine or effective treatment. Fiscal stimulus will also have to do a lot of heavy lifting, initially to provide an economic backstop and support the most needy individuals and businesses, and then later to help stimulate the economy.

Monetary policy can add stability to the financial system and help alleviate liquidity and funding problems. However, it’s not an elixir for what will increasingly ail the labor market and broader economy.

(0320-06XH)