Your frequently asked questions about the markets

1. Is the stock market disconnected from the economy?

From Liz Ann Sonders, Chief Investment Strategist:

• To some extent, yes. But remember that stocks typically lead the economy. This means that at major market inflection points, economic data is usually lagging behind. In other words, stock markets have often peaked before a recession starts, or reached a trough before an economic recovery begins.
• That said, a lot of prospective good economic news is now priced into the market. That creates a risk of market weakness if future economic news is disappointing. However, this doesn’t mean the market can’t continue to rally on additional good news.

For a more complete analysis, read: Is the Stock Market Disconnected From the Economy?

2. 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 by process of a merger. With a two-year limit to do so, SPACs offer an alternative—and generally less expensive—path to the public markets vs. a traditional initial public offering (IPO).
• Although SPACs have been around for decades, the number created has grown considerably over the past couple years. Many celebrities, ex-hedge fund managers, and former corporate executives have launched their own SPACs, stirring up concern that speculation is heating up and poses 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 Are They, and Are They a Risk to the Market?

3. Should I own Bitcoin?

From Rob Williams, Vice President of Financial Planning, Retirement Income, and Wealth Management, and Randy Frederick, Vice President of Trading and Derivatives:

• Schwab does not currently use or recommend Bitcoin in Schwab portfolios. We view cryptocurrencies as volatile, high-risk vehicles, primarily for trading with money outside a traditional portfolio.
• Bitcoin doesn’t 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 dramatic rise and fall is driven primarily by supply and demand, not inherent value.
• Clients who choose to trade cryptocurrencies have a few ways to do so at Schwab:
• Clients can trade certain over-the-counter (OTC) trust products, such as Grayscale’s Ethereum and Bitcoin products. However, keep in mind that prices for these products can be different from underlying cryptocurrency values, and they can have high operating expense ratios.
• Clients with a futures account can trade the CME Bitcoin futures product (BTC).

For a more complete analysis, read: Bitcoin FAQs

4. Is the risk of inflation growing? And what could this mean for bond markets?

From Kathy Jones, Chief Fixed Income Strategist:

• Current inflation risk depends on the time period:
• Next few months: In the near term, inflation is likely to increase on a year-over-year basis, because prices plunged last spring, as the COVID-19 pandemic began. This should be temporary.
• Next 1-2 years: Inflation is likely to remain tame because there is still ample excess capacity in the economy. The unemployment rate is very high, with about 9 million fewer jobs than a year ago, which is likely to keep wages from rising much and consumption soft.
• Next 2-5 years: Longer-term, the risk of inflation appears to be rising. Very easy monetary policy and expansive fiscal policy could fuel stronger demand and potential inflation.
• We don’t expect 1970s-style high 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: Inflation Expectations Are Up. Should Investors Worry?

5. When will the Federal Reserve raise interest rates?

From Kathy Jones, Chief Fixed Income Strategist:

• The Federal Reserve is likely to keep its benchmark short-term rate, the federal funds rate, near zero for at least another year, and possibly longer. Markets currently don’t expect to see a Fed rate hike until 2022.
• The Fed will most likely taper its monthly bond purchases before initiating a rate hike. If that begins late this year or in early 2022, the Fed would likely wait another six to 12 months to see how the economy performs before starting to raise short-term interest rates.
• Fed officials have indicated a rate hike isn’t likely until the job market is much stronger and inflation is higher.
• But at the long end of the yield curve, interest rates are rising. That’s because longer-term bonds are more influenced by supply/demand factors and inflation expectations. With the economy recovering, a large injection of fiscal stimulus. and the U.S. dollar weakening, longer-term bond yields are likely to continue to move higher.

For a more complete analysis, read Why Longer-Term Treasury Yields Are Rising.

6. Will rising federal debt slow U.S. economic growth?

From Liz Ann Sonders, Chief Investment Strategist:

• High and rising debt can slow economic growth because servicing the debt crowds out more productive spending and investments.
• However, some argue that U.S. economic growth has been slowing for decades due to demographics, globalization, innovation, and low inflation. As a result, government spending has increased to try to boost growth, which has raised debt levels.
• More debt is unlikely to generate greater economic growth, other than perhaps for a short span of time. Over the long run, the debt also represents a weight on economic growth. Note that the most recent expansion, from June 2009 to February 2020, while the longest on record, was also  the weakest on record.

For a more complete analysis, read: Will Rising Federal Debt Slow Economic Growth?

7. Should investors focus on the countries with the most rapid vaccine rollouts?

From Jeffrey Kleintop, Chief Global Investment Strategist:

• Investors shouldn't get too caught up in which country is “winning” on vaccinations. For example, Europe’s vaccine rollout is lagging those in the U.S. and U.K. by a wide margin, yet the Europe STOXX 600 index is outperforming the UK’s FTSE 100 Index and the U.S.’s S&P 500 so far this year.
• Europe’s relatively slow rollout of COVID-19 vaccine is ramping up in Q2 after supply issues slowing the pace in Q1.
• Sales for global companies that drive the major indexes are dependent upon ALL major countries seeing a vaccine-led recovery in the second half of this year. We continue to expect a strong earnings and economic recovery on the wider reopening of the economy later this year.

8. 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.
• Adversaries often use national elections and administrative changes to challenge and test foreign and domestic policy positions. Securing economic resources (COVID-19 vaccines, semiconductors, energy commodities) often heightens the risk for armed conflict between nations.
• 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.

9. What are the key policy initiatives of the Biden administration to watch in 2021?

From Michael Townsend, Vice President, Legislative and Regulatory Affairs:

• New spending proposals: The White House has proposed two sweeping plans to overhaul the economy and create jobs. The first is the American Jobs Plan, a $2.25 trillion infrastructure and green energy plan, paid for with a corporate tax increase to 28%. The second is the American Families Plan, a $1.8 trillion proposal focused on social programs like universal pre-kindergarten, a national paid leave program and free community college. That plan includes tax increases on wealthy individuals.
• Prospects and timing: Turning the White House plans into actual legislation will be a huge task for Congress. The bill or bills are likely to change significantly from what the president first proposed and will face a bumpy and complicated road on Capitol Hill. The package is seen as a positive for municipal bonds, and the stock market is likely to react favorably to long-overdue spending on infrastructure. Green energy companies could also benefit, depending on how the bill evolves. But there are concerns that the proposed corporate tax increase could be a negative for company earnings.

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

From Michael Townsend, Vice President, Legislative and Regulatory Affairs:

• The White House has proposed four main tax increases:
• Increasing the corporate tax rate from 21% to 28%;
• Increasing the top individual tax rate from 37% to 39.6%;
• Taxing capital gains and dividends as ordinary income for filers with more than $1 million in income; and
• Ending the step-up in basis for inherited assets.
• The proposals with the broadest support on Capitol Hill (and thus the best odds of passage) are the increase in the individual rate and the increase in the corporate rate, though it is likely the increase will be to 25% rather than 28%
• Few observers think capital gains will be taxed as ordinary income for any taxpayers, but that an increase for the wealthiest filers to 28%-30% could be a compromise.
• Changes to the estate tax are controversial and changes to the proposal are likely as negotiations unfold.
• Tax increases are unlikely to be retroactive to the beginning of 2021.

For a more complete analysis, read: Will Taxes Rise for the Wealthy? What You Should Know

11. 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 help provide capital preservation, diversification from stocks, and income.

For a more complete analysis, read: Do Bonds Still Provide Diversification?

12. Will the U.S. dollar continue to weaken, and could it lose its status as the reserve currency?

From Kathy Jones, Chief Fixed Income Strategist:

• The U.S. dollar has weakened since March 2020, after nearly a decade of appreciation.
• We expect this to continue over the next year, as the global economy rebounds, the Federal Reserve keeps short-term interest rates below the inflation rate, and the U.S. faces the need to finance large and rising external deficits.
• 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?

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

From Rob Williams, Vice President of Financial Planning, Retirement Income:

• As you approach retirement, start by estimating how much money you’ll need from savings in the first year of retirement.
• Consider lowering risk in your portfolio by aiming to have the amount of money you’ll need from savings after other income sources (rental income, part-time work, etc.) in a bank account and 2-4 years of savings needed invested in high-quality short-term bonds or bond funds in your portfolio.
• Consider investing in stocks and other investments based on your goals and risk tolerance.
• Don’t fixate on yield. We suggest using your whole portfolio and all sources of return, not limiting yourself 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.

For a more complete analysis, read: How to Pay Yourself in Retirement