November 22, 2024 • 36 mins
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Liz Ann Sonders, Chief Investment Strategist at Charles Schwab and Kevin Gordon, Senior Investment Strategist at Schwab, discuss US equities and macroeconomics. Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab, shares his thoughts on investing in global equities. Kathy Jones, Chief Fixed Income Strategist Schwab Center for Financial Research and Schwab Fixed Income Strategist Collin Martin look at bonds and Fed outlook.
Hosts: Carol Massar and Tim Stenovec. Producer: Paul Brennan.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:07):
This is Bloomberg Business Week with Carol Messer and Tim
Stenovek on Bloomberg Radio.
Speaker 1 (00:13):
You are listening and watching Bloomberg BusinessWeek.
Speaker 3 (00:15):
We are on YouTube Bloomberg Originals and of course on
Bloomberg Radio. We're live in San Francisco, Schwab Impact twenty
twenty four, Carol mass or Tim Stenovik. We are surrounded
by around I don't know, forty five hundred attendees, so
a lot of folks registered investment advisors, all of the
support network that works with them, So a lot of
conversations about the market environment, the services needed, what's going
(00:36):
on with money management. And I got to say this
hour is kind of a special one.
Speaker 2 (00:40):
It is.
Speaker 4 (00:41):
Hey, I'm gonna just do some breaking new You have
a headline because I have some breaking news here a
redhead coming from our own Mark Germ and Apple is
racing to develop a more conversational version of its Serrie
digital assistant, aiming to catch up with Open Eyes, Chat,
GPT and other voice services. According to people with knowledge
of the matter, Apple aiming to launch a Siri up
in twenty twenty six, with more in house AI.
Speaker 3 (01:02):
I'm a little sensitive having just done a big panel
here with some great panelists up on stage in one
of the keynotes, and it was.
Speaker 1 (01:08):
All about AI. But I do feel like that is.
Speaker 3 (01:10):
Such continues to be a big part of the conversation
even here at Schwab twenty twenty four. All right, so
let's get to it, because we want to start kicking
off this whole hour talking global equities, US equities, fixed income.
We want to start with US equities. We've got it
for a terrific duo to do that. Lyz Anne Saunders,
Managing Director, chief Investment Strategist at Charles Schwab Here at
(01:30):
Schwab Impact along with Kevin Gordon, Director Senior Investment Strategies
at Charles Schwab. Guys, welcome, Welcome, Thank you, or I
should say thank you for having us.
Speaker 1 (01:39):
US welcome impack again, thanks for coming.
Speaker 3 (01:41):
I want to ask you kind of conversations you guys
are having about the markets between yourselves about what's going on.
Speaker 1 (01:48):
Is there a debate?
Speaker 5 (01:48):
Well, no, it's just such a unique period of uncertainty
because of the different directions policy can go. And one
way we've been talking about it is we're all always
mindful of of sort of tail risks. I think the
tails are fatter because of not just the uncertainty associated
with tariffs, immigration policy, but the fact that much of
(02:10):
what appears to be the priority of the administration could
be done by executive order and doesn't have to go
through that congressional And we learned in twenty eighteen that,
you know a lot of the terriff announcements were done
by Twitter, so it's unconventional.
Speaker 1 (02:24):
Might be truth social this time.
Speaker 4 (02:26):
Maybe maybe I don't know, he's pretty click tight with Elon,
it might be Twitter.
Speaker 3 (02:32):
So then how do you think about what can you
kind of hang your hat on, Kevin, come on in
on the conversation.
Speaker 6 (02:37):
Well, I think you know, one of the hard parts
about going back to twenty eighteen twenty nineteen is, you know,
as humans, with's natural to go back to a period
of time and say, yeah, you can bring out that
playbook dusted off, especially from.
Speaker 2 (02:48):
A tariff perspective.
Speaker 6 (02:49):
What's harder this time is that we're in a totally
different macroeconomic environment where you're still dealing with ripple effects
from the pandemic, You're still dealing with a bond market
that is a little bit more unruly this time than
it was going into the first administration for Trump. So
I think that, you know, to Lazand's point about what
can be done unilaterally versus what can be done with
congressional approval, really needs to be looked at here, especially
(03:10):
from an immigration policy perspective, because most of the labor
force growth we've had over the past four years has
been from the foreign born, you know, workforce, so that
if it gets restricted, I think could be more of
a more of a problem.
Speaker 2 (03:23):
Tell little that the.
Speaker 5 (03:23):
FED comes into the mix, because the combination of immigration
policies and tariff policies, it's hard to argue against them
being inflationary. So then you have what's the FED reaction function?
If it's policy driven inflation.
Speaker 4 (03:37):
I I based on the first Trump administration, I believe,
and I'm not getting political here, I'm just stating sort
of a theory. The President elect loves to look at
the S and P. Five hundred and talk about the
S and P five hundred. That's like his report card
for how he's doing. If there is an adverse market
reaction to one of his policies, I think that would
(03:59):
be enough for him changes too.
Speaker 5 (04:00):
I think not just the S and P five hundred.
I think markets could be the decider, not just the
equity side of things, but the bond markets.
Speaker 4 (04:09):
The bond vigilances.
Speaker 2 (04:10):
Yeah.
Speaker 6 (04:10):
I think the other thing to keep in mind is
it's not as if because you know, we know that
President elect Trump is very focused on markets, that doesn't
mean that you don't get downturns and you don't get volatility.
I mean, if you just use twenty seventeen as a
case study, if I came from the future and we
were in twenty seventeen and told you we were going
to get this massive fiscal stimulus in the form of
tax cuts at the corporate and the individual level, you'd
(04:31):
probably think that's nirvana for risk assets. But the reality is,
we had the shortfall implosion in twenty eighteen. You had
a near bear market almost by a tenth of a
percentage point for the SMP in the fourth quarter of
that year, and yeah, you bounced back in twenty nineteen,
was choppy but ended up being okay. But it doesn't
mean that you eliminate all of this downside risk, especially
if it's driven more by teriff related news and you know,
the hits to manufacturing in the US that are as.
Speaker 7 (04:53):
Sociating up the hits to manufacturing.
Speaker 5 (04:54):
If you look at the ISM Manufacturing index and put
a vertical line at the start of the trade war
in twenty eighteen, it went straight down. Now we're at
lows in manufacturing. So I don't know that we have
a potential implosion from these lows, but it could be
something that prevents what was the hope for pickback up
(05:15):
and manufacturing.
Speaker 3 (05:15):
I guess I keep thinking about you know, there's the
fundamental stories of companies and profits, right that really matters.
But then you've got a layer on top of that
the politics that's going to play out, and that's going
to kind of kick investors around.
Speaker 1 (05:27):
I mean, how are you guys squaring when.
Speaker 3 (05:29):
You're going to have a client call up and say, listen, fundamentally,
earnings growth is happening, but you know.
Speaker 5 (05:35):
He keep it if you're proxying or earning's growth at
the S and P level, that's obviously biased up the
cap spectrum. You've got forty three percent of the Wrestle
two thousand or nonprofitable companies, You've got a similar share
that zombie companies.
Speaker 7 (05:50):
So I think there's a there's a much.
Speaker 5 (05:52):
Wider spread, especially when looking on the cap spectrum.
Speaker 1 (05:56):
Okay, but it.
Speaker 7 (05:57):
Often gets masked by virtue.
Speaker 5 (06:00):
There's so much focus on the large cap indexes.
Speaker 3 (06:03):
Well, funny that you say that, because I feel like
the last two weeks everybody keeps coming on and said,
guess what, it's small caps turn again?
Speaker 5 (06:10):
So is it not monolithically Okay, again, when you look
at an index as large as a Russell two thousand
to sort of just blanketly say yeah, small caps look good,
I think that there is there are interesting zombie companies
that you said, Yeah, those are not those with not
sufficient cash flows to pay even interest on their debts.
So I think you know, our our thesis around factors
(06:31):
has been, yeah, there's opportunities down the cap spectrum, but
you don't want to sacrifice quality.
Speaker 1 (06:36):
Yeah.
Speaker 6 (06:36):
And to that point about quality, I mean, if you
just used positive earnings on a trailing twelve month basis,
so earnings of EPs above zero as your your you know,
only criterion for the Russell two thousand, and you took
all of those companies, you know, it's about eight hundred
nine hundred change as a group. On average, they're up
by almost forty five percent over the past years. So
(06:56):
there are pockets of small caps that have worked. It's
just not equally distributed because of the interest rate environment
we've been in, also.
Speaker 2 (07:02):
The growth environment.
Speaker 6 (07:03):
And by the way, all of these pops that you've
had in the wrest of two thousand from time to
time over the past couple of years, every time they
get a little bit of momentum and everyone thinks it's
changing for them, it hasn't been consistent with the turned
in forward earnings growth and expectations. So until I think
you see that actual move where conviction starts to build.
From an earning standpoint, it's tough to get bullish on
the index as a whole. But to Lezan's point about
(07:25):
you know a large chunk of it being now profitable
and zombie like, it's just tough at more.
Speaker 7 (07:29):
Than the Nasdaq.
Speaker 5 (07:30):
If you look at the top ten best performers this
year in the Nasdaq, none of them are large cap stocks.
They're all small yeah to me a none of them
are in the MAGS seven. So I think we get
in this sort of tunnel of the megacap tech and
tech related names, and there's less analysis happening on everything else.
Speaker 4 (07:48):
On an index level is an Are you concerned about
the power of those mega cap tech companies? It's a
question I could have asked five years ago, it just
wouldn't have included in Vidia.
Speaker 5 (07:56):
But I think the problem of concentration in the perceived
need to be in those names in order to do well,
that's an institutional problem, that's not an individual investor problem.
If you're benchmarked against a cap weighted index, you are
at the mercy of what those largest names their contribution
to the index. But for individual investors, they're not benchmarked
(08:19):
against the S and P five they don't have to
take that same kind of concentration risk. And it's another
point behind that. What I just mentioned of top ten
best performers in the Nasdaq, they're all small to mid
cap stocks. Only one of the MAGS seven is in
the top ten best performers of the S and P
five hundred. So I think you don't need to have
that concentration risk if you're not professionally benchmarked against.
Speaker 7 (08:43):
The S and P.
Speaker 3 (08:44):
What do you think are the biggest risks right now?
Do we have clarity on it for twenty twenty five.
Speaker 6 (08:48):
I mean, from a policy standpoint, that's probably the easy
one to throw out there. But I think just the
lack of clarity.
Speaker 1 (08:52):
Policy meaning government will also sand policy.
Speaker 6 (08:55):
More Washington policy, but I think they're tied together now. Yeah,
because I could see a scenario where if you do
get more restrictive labor force growth coming from the outside,
but also if there is a chunk of the labor
force physically removed from the country, that's probably an inflationary problem.
Speaker 2 (09:09):
And I've also yet to I love.
Speaker 3 (09:11):
That you guys are going there because I don't think
people realize. We certainly hear it from CEOs that they
are so worried that they're not going to have access
to a labor force and what that means their ability
to do things.
Speaker 7 (09:20):
And it's an increase in.
Speaker 5 (09:23):
The cost of labor costs, right, and it's a decrease
in labor supply.
Speaker 7 (09:28):
There's the demand side of that as well.
Speaker 2 (09:30):
I can shuck in a demansion.
Speaker 4 (09:31):
I can't get a CEO to seriously explain that that
will affect them at this point in the last two weeks,
even if they don't employ people who didn't come to
this country illegally. Right.
Speaker 5 (09:42):
How how often do you talk to smaller company CEOs.
Speaker 4 (09:46):
I recently, did you actually talk to me?
Speaker 5 (09:48):
I talked to you in the spaces where migrant work
is a large.
Speaker 1 (09:53):
Construction in hospitality, construction, restaurants.
Speaker 6 (09:57):
Almost twenty percent of the construction sector is undocumented.
Speaker 3 (10:00):
I have two brothers who are contractors. They're like, they
can't find work.
Speaker 4 (10:03):
But I think the important point is that it's not
just you could not You could run a company that
doesn't employ any undocumented workers, You're still going to see
labor costs rise if eleven million people are taken out
of this country who are doing work.
Speaker 1 (10:16):
That's right.
Speaker 6 (10:17):
Yeah, it's a demand shock, it's a supply shock, and
I think we sort of lose sight of the fact
on the demand side, especially because the supply side is
looked at maybe sometimes more of an issue in terms
of the makeup of a particular industry or the makeup
of the labor force. But if you're taking demand out
of the country, but you're also not being able to
fill the supply hole that you're leaving, that's sort of
(10:37):
a stagflationary shock.
Speaker 4 (10:39):
So what does it do to the market if that
policy ends up coming to fruition.
Speaker 6 (10:43):
Well, I mean, I think it's it depends if it's
phased over time.
Speaker 5 (10:46):
Yeah, and you know, we don't know the logistics around
whether we even possibly could get to the high end
of what the campaign pledges.
Speaker 1 (10:57):
The reality of that, right, But Peterson.
Speaker 5 (10:59):
Institute on if you guys saw it, just did a
study on okay, let's take it to the extreme, both
on the immigration side of things, on the tariff side
of things, and they actually added an interesting little wrinkle
into the mix. If there continues to be a threatening
of FED independence, all three of those collectively are unquestionably
higher inflation, lower growth.
Speaker 7 (11:20):
Kind of backdrop.
Speaker 5 (11:21):
Now we you know, the real answer maybe somewhere in
the middle of nothing gets done and the extremes both
on immigration and teriffs.
Speaker 1 (11:29):
But it's a wait and see.
Speaker 7 (11:30):
Mode, right.
Speaker 2 (11:30):
Yeah.
Speaker 6 (11:31):
Even on the tariff front, I've yet to see a model,
and all the research that we read, I've yet to
see them out of that doesn't suggest it's a stagflationary
shock where over time you get this boost to inflation,
but you also get a hit to growth.
Speaker 3 (11:42):
I want to go back to the market as kind
of a clearing house for all of the information, because
they do feel like the market smacks down policies or
initiatives very quickly. I feel like much more than it did.
I don't know ten years ago. Maybe it's because of
social media and stuff just piling through. Do you assume
that will continue and that will send messages to Washington
and maybe so that things aren't so severe.
Speaker 5 (12:04):
It will send messages. How much they're heated, that we
don't know.
Speaker 3 (12:08):
But especially when I think about the FED and the
independence of the FED, like that to me would be
something that would bring well to me.
Speaker 5 (12:13):
The most fascinating part of Palace press conference at the
most recent FOMAC meeting was the definitive no. As soon
as that happened, I thought, that's the headline, and that
should be the headline. So I don't worry about that
piece of it all that much. But all of this
gets to what we are One of our thesis is
(12:35):
that this sector dispersion, these rapid fire rotations that are
happening at the sector level, are going to persist. The
drivers going forward may be more specific to things like
tariff policy announcements, and we saw that in twenty eighteen
there was you know that that voting mechanism that happened
so quickly with markets maybe doesn't appear acutely at the
(12:58):
broad index level, but I think you're going to see
it at the industry level, at the sector level, tied
specifically to both tariffs and immigration sense.
Speaker 4 (13:07):
Hey, we're speaking with Lizene Saunders, Managing Director, chief investment
strategist at Charles Schwab on site at Schwap Impact, along
with Kevin Gordon, Director, Senior investment Strategist at Charles Schwap. Kevin,
I believe a year ago we were sitting here it
was October of last year at Philadelphia s and P
five hundred is up forty percent since our conversation with
a What a thunk?
Speaker 2 (13:27):
And what was interesting too?
Speaker 6 (13:28):
I remember talking to you guys about the unique nature
of this bull market, and at that point it had
been so unique where even for something like small caps
in the rustle of two thousand, it was breaking new
bear market lows and that has just never happened before.
You also had sectors in the SMP that had not
been up, and that that was just so unique about
what the structure was of the bowl in its early phases,
where typically even after you go through a non recessionary
(13:50):
bear you do tend to see a lot of participation
at any sector level, at any cap level, but we
just haven't seen that. But I will say, and what's
been nicer to see this year is that participation has
really improved, especially since that Midsummer mark where broad at
seven really started to take a little bit of a
step back, not outright decline, but take a step back.
Tech took a step back, even semiconductors. Recently, I find
(14:11):
that the weakening and that breadth profile actually just fascinating,
while the rest of the market has actually been able
to power forward. And that's I think what has actually
been lost in all of the election related narrative recently,
especially around some of the strength around areas like financials.
Speaker 2 (14:24):
Financials were strong heading into the election.
Speaker 6 (14:26):
Industrials were strong heading into the election, so it's not
as if you got this massive shift in the leadership
profile of the market. I think that's been a relatively
healthful all year.
Speaker 5 (14:34):
There's been massive churn under the surface of these cap
weighted indexes. So the Nasdaq had a thirteen percent draw
down in that Midsummer period of time, but the average
member draw down for the NASDAK is forty seven percent
year to date. So sometimes when people talk about the market.
(14:56):
It sort of begs, well, what piece of the market
are you talking about? These half weighted into right dangerous?
Speaker 6 (15:04):
Actually, and we've been calling for a good chunk of ear.
We're calling it the Michael Caine Duck market. You know,
just calm on the surface, the pattern like the tickens underneath.
That's that's been how we've been describing it.
Speaker 3 (15:13):
So does though, all right, so what's the environment for
twenty twenty five?
Speaker 1 (15:16):
Can you make a call?
Speaker 3 (15:18):
Well, we never make a call, okay, So I mean
I keep worrying what are we missing? We haven't had
a recession, we have had pockets of recessions, we've.
Speaker 7 (15:28):
Had the role through.
Speaker 1 (15:29):
How are we done with it?
Speaker 2 (15:30):
Then?
Speaker 5 (15:31):
You know, my hope was that we were going to
get to a point where if we started to see
weakness show up more acutely in the services sector, in
large part, probably driven by any further weakness in the
labor market, that, especially if the FED was an easing mode,
you might be in a position to see stabilization, if
not recovery in those areas that already taken their hits, like.
Speaker 7 (15:51):
Manufacturing, like housing.
Speaker 5 (15:53):
I don't want to say that's off the table now,
but it's a little bit more difficult post election to
come up with the case for stabilization and improvement in
those areas, especially if the FED doesn't stay in easing mode.
We saw this and tempted some recovery in housing, and
then it faltered again courtesy of the move up in
(16:13):
long yields.
Speaker 6 (16:14):
So I think the other thing too, from evaluation in
a sentiment perspective, is that you're getting pretty stretched across
most of the metrics that we track, and it's not
just in the traditional attitudinal how do you feel about
the market? You know, aaii bulbear indicator. It's now filtering
over into what are investors actually doing with their money.
We've seen equity ETF inflows completely spike akin to levels
(16:35):
that you saw a.
Speaker 1 (16:36):
Market funds too.
Speaker 6 (16:38):
Absolutely, yeah, So I think that becomes a little bit
more of a risk in the event there's a negative catalyst.
We always say sentiment for off. The sentiment and of
itself is not a reason that the market just goes lower.
It has to be tipped in that direction. It's just
the sentiment backdrop that makes things more proper.
Speaker 5 (16:50):
I also don't think we should look at the money
and money markets as some giant pool of imminent funds
dying to go into the equity market. I think that's
a lot of that is pretty sticky money.
Speaker 1 (17:00):
That's exactly.
Speaker 4 (17:01):
We get one trillion, two trillion, we'll go into the
avenue market. Well, last we just talked about US equities.
It's time to go global, which for many years has
lagged the US. Let's just go to the numbers here,
because over the last decade, the S and P five
hundred has on average returned thirteen zero point one five percent.
The footsy global all cap x US contracts stocks and
developed and emerging markets outside of the US that's only
(17:23):
returned about five point twenty five percent on average, a
difference of nearly one hundred and eighty percent over the
last decade, so some serious underperformance. It's been hard to
beat the US when it comes to equities gains this
year and this last decade. Here with the global view
and where there are opportunities around the world, we got
a Jeffrey clentp with us. He's managing director and chief
Global investment strategist at Charles Schwab. He joins us here
(17:44):
in San Francisco. Good to see you again. How are
you great?
Speaker 2 (17:47):
To be here. I'm doing fantastic. Thanks, thanks for being here.
Speaker 4 (17:49):
What's top of mind for you? Especially against a backdrop where, gosh,
every year it's like this is not international year.
Speaker 1 (17:55):
Yeah, no, you're not alone.
Speaker 2 (17:56):
People.
Speaker 1 (17:57):
You have time to buy internationally well.
Speaker 8 (17:59):
And it's for a couple of good reasons too, right,
I mean, the obsession with AI and stocks like Nvidia
have just really been focused on the US market, and
tech has been the best performer in the US, and
tech is the biggest sector in the US and it's
not elsewhere. The other thing is that those other economies
have been lagging US economic and earnings growth.
Speaker 2 (18:17):
That could be different next year though.
Speaker 8 (18:19):
We're actually already seeing a shift towards financials leading markets overseas.
That could be the next step for the US as well,
big break cup beneficiary. In addition, we're seeing global economic
growth finally begin to converge. US and China expected to
slow next year, but Europe, Japan, Canada, Australia all expected
to pick up economic momentum next year, along with earnings growth.
(18:40):
As a matter of fact, here in the third quarter,
we're just getting done with the earnings reports. Earnings growth
for European companies actually outpaced the SMB five hundred for
the first time in five or six quarters, so.
Speaker 2 (18:49):
We may be starting to see a turn there.
Speaker 3 (18:51):
But what are you seeing in terms of flows, because
it does feel like investors are still holding back and
just kind of all in on the US trade.
Speaker 8 (18:57):
They are in post election. I think a lot of
investors believe, hey, we just had an election. I probably
need to make changes in my portfolio. But they can
be detrimental. Think back to twenty seventeen, right, So, coming
out of the twenty sixteen election, America First policies were
thought to really help US small caps and really hurt
emerging markets. The exact opposite occurred to emerging markets were
the best performers in twenty seventeen, small cap US the worst.
(19:19):
So not saying necessarily it's a perfect play again a repeat.
Speaker 2 (19:24):
Of all that, but the flows can be misleading.
Speaker 3 (19:27):
What happened last year, because we were thinking about our
conversations that we had with you and some of the
other members of the SHWAP team.
Speaker 1 (19:32):
You were bullish on internationals. What happened last.
Speaker 3 (19:35):
Year that you think okay was a surprise or just
why it didn't pan out, or you misread.
Speaker 2 (19:40):
The tea leaves well a few different things.
Speaker 8 (19:42):
One, I think the technology thing has just run longer
and harder than I thought of what I thought we'd
see a broader trade in particular exactly, yeah, and so
we didn't see that broadening. I think we're starting to
see some of that now, but we just didn't. The
other thing was we did see a stumble in the
manufacturing recovery. So I was basing this on a what
I call it a cardboard box recovery, that demand for
making things and shipping things would would pick back up again.
(20:05):
It did in the first half of the year, it
rolled over sharply in the second half, and the Global
Purchasing Managers Index for manufacturing back below fifty. I think
that usually as a lag with Central Bank policy of
about nine months. We're at the turning point there where
I think that starts to pick up next year. So
I think it is delayed and not disrupted.
Speaker 4 (20:21):
Where do tariffs come into this equation? Boy, this is
a tough one. If you're thinking internationally, you're saying, wait
a second, Okay, we get this America First policy coming
once again, starting in you know, January twentieth. There's a
lot of Republicans in Congress right now who look like
they're ready to help the president elect to push through
that agenda. What do you do if you're an investor
(20:42):
outside of the US and you're saying to yourself, wait
a second, these companies outside the US could be hit
with tariffs.
Speaker 2 (20:46):
Yeah, and the numbers are scary.
Speaker 8 (20:48):
Sixty percent on China, twenty percent across the board, two
hundred percent on John Deer tractors coming from Mexico. If
you add them all up and I have, and you
wait them by their import percentages, you get a twenty
six percent an import tariff in the US on average.
That's up from two point six right now. That's like
smooth Hally level great Depression era level tariffs. But I
(21:08):
think the reality is going to be quite different from that.
I'd look as an example in Europe. So Europe on
October twenty eighth, just slapped forty five percent tariffs on
electric vehicles from China.
Speaker 2 (21:17):
Within two days.
Speaker 8 (21:18):
Chinese delegates where they are working out a way to
get rid of those, they seem to make some technical
progress over the last couple of weeks, maybe scrapping those
tariffs in favor of import quotas, which is a far
less disruptive way of doing things. So I think that's
probably maybe a way we can look at what the
future path of tariffs might look like.
Speaker 3 (21:32):
Jeff, how do you think about the pushback in globalization?
We have a lot of CEO say, listen, it's not
going away. Yes, supply chains are changing or bringing do
more nor shoring or on shoring. But I'm just curious
how what's going on in globalization wars around the globe,
how that is impacting the international investment play.
Speaker 8 (21:52):
So it seems like there are multiple supply chains now
instead of just one. Right, So you don't just assemble
your product in the cheapest labor market, You're going to
have to multiple supply chains.
Speaker 2 (22:00):
That seems to be what's happened.
Speaker 3 (22:02):
Is that good for companies, costs their earnings there, what
their balance sheets look like, for their investment potential.
Speaker 8 (22:07):
But it's less efficient, so it should be more costly.
At the same time, we've been able to miniaturize manufacturing
globally in a way that's made it not as inefficient
to have multiple supply chains as it used to be.
And with perhaps AI robotics, a number of these potential innovations,
we could maybe scale that even further to where it's
less of a dragon corporate profit.
Speaker 4 (22:27):
Interesting. Okay, So how do you see this happening outside
of the US versus inside the US? If we're if
we're thinking about the companies that are doing this type
of innovation, who are the beneficiaries here?
Speaker 8 (22:36):
Well, I mean, you know, I think it's those that
are really looking to scale up their productivity per worker.
So you're looking at healthcare, You're looking at financial services.
Those are two areas very much more representative outside the
US than inside the US. So the potential for productivity
gains I think are skewed to those businesses. Financials are
the biggest sector outside the US, and there's a whole
(22:56):
lot that can be done.
Speaker 2 (22:57):
With AI there.
Speaker 3 (22:58):
All Right, we know you don't do individual stocks, but
when you look around the world, then I do feel
like I just want to talk some regions. I think
about Japan, and I do feel like the momentum this
year has definitely changed on Japan. Give us kind of
your thoughts about what we see in twenty twenty five.
Speaker 8 (23:11):
So I think you see radhikes from the Bank of Japan,
and so I think that begins to bring some strength
back to the end and we start to see some
capital come back to.
Speaker 2 (23:21):
Japan.
Speaker 8 (23:21):
We've got a number of businesses really ramping up their
share buybacks and their dividends, and so the return to
shareholders seems to be picking up. And so if we
get a manufacturing recovery, that's what Japan does. And so
if we get that global manufacturer recovery, I think that
does disproportionately benefit SPAN.
Speaker 3 (23:37):
What about Europe in terms of wars and stuff, So
what's the kind of smart I hate to put everything
in a bucket because I don't think that's fair. But
what are you thinking about for twenty twenty five in
terms of where are the pockets of opportunities in particular
for investors and where maybe not so much.
Speaker 8 (23:51):
You know, One of the things I think Europe might
look to do is buy US weapons to fund the
war in Ukraine, to narrow the trade deficit with the US,
avoid across the board tower and actually achieved maybe their
objectives in keeping Russia at bay. One of the things
I think it's interesting is European automakers. They could be
in the crosshairs of Trump tariffs. Right the stocks fell
seven to nine percent right after the election, But they've stabilized,
(24:13):
they've started a rebound because I think if you look
at what's likely to occur, maybe we go from a
two and a half percent tariff on Europeans cars to
ten percent that will be equivalent to the US tariff.
That's seven and a half percent increase in tariffs has
already been offset by the fact that the dollars up
five percent versus the euro right, So we've already kind
of adjusted for some of those factors, and I think
therefore that seven to nine percent to climb in those stocks.
Speaker 2 (24:36):
Maybe for the reverse is.
Speaker 4 (24:37):
Your what is the region of the world where you're
most optimistic.
Speaker 8 (24:40):
I think it probably is Europe. One thing, because price
arnings ratios are pretty attractive. They're below their ten year average.
Speaker 1 (24:46):
Such a great good deals valuation.
Speaker 8 (24:48):
Yeah, I mean, take a look at difference between Coke
and Nestley. Nestley trading at a four pe discount to
Coca Cola. They have literally the same customers and operations
around the world, which you're paying a big premium for
Coke because the investor base is different. So I think
that comes back. I think earnings growth does pick up
next year. We're already starting to see signs of that.
And then five rate cuts by the ECB by June
of next year versus maybe two for the FED. I
(25:09):
think that ease if financial conditions, really does help to
support that rise.
Speaker 3 (25:12):
And I'm glad you went there because I do think
a lot about the differences in central bank policy right
based on their specific outlooks and what that gap means
in terms of opportunities for investors. And you're saying that
spread between what Europe does in terms of monetary policy
versus the US could provide opportunity.
Speaker 8 (25:26):
It's a drag on their currency versus the dollar. Obviously
the dollar we go up, but maybe that's a few
percentage points. Each point of pe expansion in Europe from
fourteen is a seven percent gain on prices, So you
get one or two of those, and that's going to
outweigh anything you're going to get in terms of currency drag.
Speaker 4 (25:42):
I want to go back to Carol's question about the war,
because if you are most optimistic about Europe, how do
you factor that into how you're thinking about the region,
Because there is a chance that with the incoming Trump
administration and the rhetoric around how they want to support
Ukraine or they don't want to support Ukraine, that there
(26:02):
could be a risk of that war ending in Ukraine losing.
Speaker 8 (26:07):
There certainly is a lot of uncertainty, of course, the
next year in terms of where they draw borders into
sometimes cease fire agreement, and in anticipation of that, both
sides trying to you know, gather territory and try and
redraw those lines. Ukraine is funded through twenty twenty five.
Most governments have already committed those resources. There's a lot
of weapons on the way, So the whole idea of
(26:28):
a day one ceasefire probably doesn't seem likely. But somewhere
over the course of the year perhaps where those lines
are drawn, I don't know, but I do believe that
there's going to be a lot more spent in terms
of defense in Europe and that could have some stimulative aspect.
Speaker 3 (26:40):
Jeff, you know, we've all been doing this a long
time and seen a lot of different market cycles, and
I'm just curious how you're thinking about, you know, the
investment environment for the international play or global play today
versus kind of where it was a few years ago.
Is it more difficult is it more transparency.
Speaker 1 (26:58):
Give me some thoughts on that. You've seen a lot
of market cycles.
Speaker 2 (27:01):
Yeah, it's so this one is so much tied to sectors.
I think.
Speaker 8 (27:04):
So the US is basically a tech ETF and nothing wrong.
Speaker 2 (27:08):
With that, it's just recognizing it.
Speaker 8 (27:10):
But there are other countries that align with a particular
sector as well. You know, Germany is an AUTOETF, Australia
is a metals and mining ETF, a Canada's a financials ETF.
So if you think about sector diversification, you may love
the US, but honestly, it's a tech ETF. So if
you want some sector diversification, move away from just what
has become really kind of a really concentrated AI play.
You need that international diversification in your portfolio. And that's
(27:32):
a different way of thinking about it that maybe.
Speaker 4 (27:34):
In the past thirty seconds on China.
Speaker 2 (27:37):
China is very likely to slow next year.
Speaker 8 (27:38):
They're not allocating the resources to the consumer and to
the property market. It's still a strategic focus on self
sufficiency and semiconductors and so many other things.
Speaker 2 (27:46):
So slower growth but not really rebounding.
Speaker 4 (27:50):
What type off would it be?
Speaker 1 (27:51):
Yeah, what.
Speaker 2 (27:55):
At this point, maybe an infrastructure ETF.
Speaker 3 (27:57):
Yeah, do you still feel like we're lacking transparency? China
just got about twenty seconds.
Speaker 2 (28:02):
I think it's getting better.
Speaker 8 (28:03):
I don't think they have the same incentives to create
the same type of economic data that we create in
the West.
Speaker 3 (28:08):
Yeah, all right, great stuff, Thank you so much. Around
the world, we went well done.
Speaker 1 (28:12):
Well done.
Speaker 3 (28:13):
Jeffrey Kleinapp, managing director, a chief global investment strategist at
Charles Schwab. Right here at Schwab impact bond investors searching
for some direction today. This is you know, there's so
many factors. You've got Russia's escalation of warfare and Ukraine.
You've got the Murphy Murky outlook, excuse me for what
the Fed's going to do in their interest rate cut
policy going forward. And then there's the leadership of the
(28:35):
US Treasury Department. There's a lot of dynamics very important
to the treasury trade going on right now.
Speaker 4 (28:39):
Yeah, they're also traders thinking about, okay, what's the FED
going to do for the remainder of the year and
next year. Well, we got two great voices who focus
on fixed income strategy at Schwab with us now Kathy Jones,
Managing director, fixed income strategist and Colin Martin, director of
Fixed income Strategist. Good to have you both with us.
Speaker 2 (28:55):
How are you good?
Speaker 7 (28:57):
Little tired?
Speaker 1 (28:57):
Been a big busy week, but nothing going on in
the treasury trade this year kind of thing.
Speaker 4 (29:03):
Well, I want do you want to start with you, Kathy,
and how you're thinking about what the FED is going
to do and if that changed it all given the
election results a couple of weeks ago.
Speaker 9 (29:12):
Yeah, I think the case for a pause is growing
a bit stronger at this stage of the game. So
you know, we've had stronger than expected economic data now
for a while, particularly like the retail sales telling us
the consumers doing well, and so then the question is
does a FED.
Speaker 1 (29:28):
Really need to cut rate to help out?
Speaker 9 (29:32):
We have very easy financial conditions as the stock market
keeps going higher and credit spreads get tighter and so
you know, and then we have all the uncertainty about
what fiscal policy will be going forward, so we don't
know what tariffs will or won't be imposed, We don't
know what tax policy will be, how it will affect
(29:55):
both the economic.
Speaker 1 (29:56):
Growth big like if list or what might happen.
Speaker 9 (30:00):
And then immigration reformist, I particularly think is one of
the most important components for inflation and growth going forward,
because again we don't know what the actual policy will be,
but if you kind of take things at face value,
that could reduce the workforce by seven or eight percent.
That's a huge, huge issue.
Speaker 3 (30:19):
So Colin, you guys, you guys, you and Kathy have
to figure out though fixed income strategy and what you're
thinking about. Right people look to you to kind of
get an idea of what's to come maybe in twenty
twenty five. So what do you feel comfortable kind of
saying right here on this Thursday after NU about that.
Speaker 10 (30:33):
Yeah, Well, we've kind of revised our guidance a little
bit lately because of so many of the uncertainties that
Kathy just highlighted, where there's this wide range of outcomes
because of the proposed policies, what gets implemented, when they
get implemented, and what that impact is. So given that,
and given the I think the risk is to higher
yields than lower yields if we do get some sort
of inflationary impact. So our guidance now, our main guidance
(30:55):
for investors is to really focus on a benchmark or
below benchmark average duration. I don't think it makes a
lot of sense to dive in with long term bonds
right now because of the rest of those prices if
they fall. I want to make it clear though, that
that's a tactical idea. From a strategic standpoint, we still
think the yields are pretty attractive. So if you're an
investor you're looking for for five six percent yields, you
(31:16):
can get that right now, if you have that time horizon,
and if if that's going to help you reach your goals,
then I think that's really attractive right now.
Speaker 1 (31:23):
But just be prepared that if we see yields in.
Speaker 10 (31:26):
Shop when we talk about our upside, maybe maybe we
go to five percent on the ten year treasure yield.
Speaker 9 (31:31):
But maybe likely possibly possibly yes, okay, to all three.
Speaker 2 (31:36):
Yeah.
Speaker 9 (31:38):
So you know what we do is you try to
model out we deconstruct the tenure yield. Then we try
to model out, well, if we change this component, what
happens in that component?
Speaker 7 (31:47):
Or if you just look at the spread.
Speaker 3 (31:48):
There's a lot of components to play around with, right, yeah, exactly,
and or you just look at the spread between the
Fed funds rate and tenure yields.
Speaker 9 (31:56):
Historically it can be a you know, one hundred to
one hundred and fifty base point. So if the FED
can't go below four percent, you could easily get to
five percent plus just based on history. But we do
think the FED will get below four percent by some amount.
Speaker 1 (32:12):
But again, a lot of ifs in.
Speaker 9 (32:15):
There, and so we're just trying to be as cautious
as we can right now without giving up too much income.
Speaker 4 (32:21):
Hey, Colin, play that scenario for us, if we do
hit five percent on the ten year, what that looks like,
What the implications of that are for the economy? And
I mean I think a lot about different areas of
the market that have expected lower interest rates. If we
don't get those, what happens.
Speaker 7 (32:36):
So I think what it looks like.
Speaker 10 (32:37):
I think it looks attractive, and I think if we
get there, I think that can draw in a lot
of demand. I think whether it's domestically or internationally, I
think there'd be a lot of demand, especially that we're
seeing these interest rate differentials. We're seeing other central banks
expected to cut more than the US. I think that's
number one to what happens to the economy and to
barrow wers. I think it's more of a mixed bag
right there, because if you look at both the consumer
side of the equation and what I focus on in
(32:59):
the corporate bond market, corporations just haven't really had that
negative impact of rising interest rates. Something I've looked at
recently as why so because they because they did the
same thing that that homeowners did.
Speaker 1 (33:10):
They refined, right, they refined.
Speaker 10 (33:12):
So if you look at I'll use high yield bonds
for example.
Speaker 1 (33:14):
The average which is having a moment.
Speaker 10 (33:16):
They're having a moment. Spreads are at you know, the
fifteen year lows. The average coupon rate. Now that's there
can be high or lower. The average coupon rate of
that index's right where it was in twenty nineteen. It's
risen a little bit over the past year or so.
But because companies just refinance. So if rates keep rising
from here, although the trend is the opposite right now,
but if they were to move up a little bit,
that would impact the leveraged borrower. But for the most part,
(33:40):
their fundamentals are pretty strong.
Speaker 1 (33:43):
So the opportunity.
Speaker 3 (33:45):
So when you know someone comes to you and says, so,
where are the best opportunities right now? If I have to,
I want to put some money in the fixed income area, Kathy,
what do you say.
Speaker 9 (33:53):
Well, again, if your time horizon is five years plus
and you're willing to kind of ride out the ups
and downs, you're looking at five to five and a
half percent yields without taking much credit risks.
Speaker 1 (34:03):
So I'll see their investment great corporate bond at treasuries
and mbfs.
Speaker 9 (34:08):
If just look at the egg, your total return is
going to be pretty attractive and your income stream is
going to be important. So keep in mind, you know,
we had a rocky period in twenty twenty two because
there was no coupon income. We're coming off zero now
we're starting with coupons, you know, close to five percent.
Speaker 1 (34:26):
That keeps your return much more solid going forward.
Speaker 9 (34:29):
So we like higher credit quality in general, but definitely
lots of places to lock in that yield.
Speaker 1 (34:36):
How oh go ahead?
Speaker 7 (34:37):
Oh you got.
Speaker 4 (34:38):
I wanted to talk a little more macro and think
about policies come January, because Kathy, you mentioned a lot
at the top when it comes to labor market, when
it comes to tariffs. Do you believe these policies are
actually likely to be implemented given that they actually could
have severe economic consequences.
Speaker 9 (34:52):
I have no idea, and I will be honest with you,
because we know that one thing that President elect Trump
has has has been in favor of it forever's tariffs.
So we do believe pretty strongly there'll be some sort
of tariffs. Now, will they be modified, Will will industry
is affected by the tariffs be subsidized as they were
in his previous administration with the farmers. We don't know
(35:15):
the details of that, but tariffs seem very likely after that.
Really hard to say, you know, tax policy and immigration,
hard to say what.
Speaker 1 (35:24):
Will really happen? Just got about thirty seconds.
Speaker 3 (35:26):
Is there a moment in time that you're thinking, Okay,
maybe six months from now, eight months from now will
much more clarity about what this new administration can get
done and we can be more definitive in terms of
our thinking about going forward. Is there a timeframe that
you're thinking about for next year?
Speaker 9 (35:40):
Yeah, I think when they actually have to debate the
Tax Cut Act that was previously that will be expiring,
then we should get a better idea of what Congress
is willing to do.
Speaker 10 (35:53):
Final thought from you, Yeah, no, I would agree. I
think I think yes, we'll have more clarity just because
more time will have passed, but I think we're going
to have a lot of uncertainty over the next year,
two years, four years. So yes, more clarity, but not
all the answers that we're going to need.
Speaker 1 (36:07):
Keeping us on our toes again.
Speaker 3 (36:10):
Thank you both so much, so appreciate what we could
kind of finish up with the Fixed in Coventry. It's
been such an important one, no doubt about it, and
something we've been following so closely. Kathy Jones, Managing director
of Fix Comes Strategist, Colin Martin, Director of Fiction in
Comes Strategist.
Speaker 1 (36:21):
Right here at Schwab Impact
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:07):
This is Bloomberg Business Week with Carol Messer and Tim
Stenovek on Bloomberg Radio.
Speaker 1 (00:13):
You are listening and watching Bloomberg BusinessWeek.
Speaker 3 (00:15):
We are on YouTube Bloomberg Originals and of course on
Bloomberg Radio. We're live in San Francisco, Schwab Impact twenty
twenty four, Carol mass or Tim Stenovik. We are surrounded
by around I don't know, forty five hundred attendees, so
a lot of folks registered investment advisors, all of the
support network that works with them, So a lot of
conversations about the market environment, the services needed, what's going
(00:36):
on with money management. And I got to say this
hour is kind of a special one.
Speaker 2 (00:40):
It is.
Speaker 4 (00:41):
Hey, I'm gonna just do some breaking new You have
a headline because I have some breaking news here a
redhead coming from our own Mark Germ and Apple is
racing to develop a more conversational version of its Serrie
digital assistant, aiming to catch up with Open Eyes, Chat,
GPT and other voice services. According to people with knowledge
of the matter, Apple aiming to launch a Siri up
in twenty twenty six, with more in house AI.
Speaker 3 (01:02):
I'm a little sensitive having just done a big panel
here with some great panelists up on stage in one
of the keynotes, and it was.
Speaker 1 (01:08):
All about AI. But I do feel like that is.
Speaker 3 (01:10):
Such continues to be a big part of the conversation
even here at Schwab twenty twenty four. All right, so
let's get to it, because we want to start kicking
off this whole hour talking global equities, US equities, fixed income.
We want to start with US equities. We've got it
for a terrific duo to do that. Lyz Anne Saunders,
Managing Director, chief Investment Strategist at Charles Schwab Here at
(01:30):
Schwab Impact along with Kevin Gordon, Director Senior Investment Strategies
at Charles Schwab. Guys, welcome, Welcome, Thank you, or I
should say thank you for having us.
Speaker 1 (01:39):
US welcome impack again, thanks for coming.
Speaker 3 (01:41):
I want to ask you kind of conversations you guys
are having about the markets between yourselves about what's going on.
Speaker 1 (01:48):
Is there a debate?
Speaker 5 (01:48):
Well, no, it's just such a unique period of uncertainty
because of the different directions policy can go. And one
way we've been talking about it is we're all always
mindful of of sort of tail risks. I think the
tails are fatter because of not just the uncertainty associated
with tariffs, immigration policy, but the fact that much of
(02:10):
what appears to be the priority of the administration could
be done by executive order and doesn't have to go
through that congressional And we learned in twenty eighteen that,
you know a lot of the terriff announcements were done
by Twitter, so it's unconventional.
Speaker 1 (02:24):
Might be truth social this time.
Speaker 4 (02:26):
Maybe maybe I don't know, he's pretty click tight with Elon,
it might be Twitter.
Speaker 3 (02:32):
So then how do you think about what can you
kind of hang your hat on, Kevin, come on in
on the conversation.
Speaker 6 (02:37):
Well, I think you know, one of the hard parts
about going back to twenty eighteen twenty nineteen is, you know,
as humans, with's natural to go back to a period
of time and say, yeah, you can bring out that
playbook dusted off, especially from.
Speaker 2 (02:48):
A tariff perspective.
Speaker 6 (02:49):
What's harder this time is that we're in a totally
different macroeconomic environment where you're still dealing with ripple effects
from the pandemic, You're still dealing with a bond market
that is a little bit more unruly this time than
it was going into the first administration for Trump. So
I think that, you know, to Lazand's point about what
can be done unilaterally versus what can be done with
congressional approval, really needs to be looked at here, especially
(03:10):
from an immigration policy perspective, because most of the labor
force growth we've had over the past four years has
been from the foreign born, you know, workforce, so that
if it gets restricted, I think could be more of
a more of a problem.
Speaker 2 (03:23):
Tell little that the.
Speaker 5 (03:23):
FED comes into the mix, because the combination of immigration
policies and tariff policies, it's hard to argue against them
being inflationary. So then you have what's the FED reaction function?
If it's policy driven inflation.
Speaker 4 (03:37):
I I based on the first Trump administration, I believe,
and I'm not getting political here, I'm just stating sort
of a theory. The President elect loves to look at
the S and P. Five hundred and talk about the
S and P five hundred. That's like his report card
for how he's doing. If there is an adverse market
reaction to one of his policies, I think that would
(03:59):
be enough for him changes too.
Speaker 5 (04:00):
I think not just the S and P five hundred.
I think markets could be the decider, not just the
equity side of things, but the bond markets.
Speaker 4 (04:09):
The bond vigilances.
Speaker 2 (04:10):
Yeah.
Speaker 6 (04:10):
I think the other thing to keep in mind is
it's not as if because you know, we know that
President elect Trump is very focused on markets, that doesn't
mean that you don't get downturns and you don't get volatility.
I mean, if you just use twenty seventeen as a
case study, if I came from the future and we
were in twenty seventeen and told you we were going
to get this massive fiscal stimulus in the form of
tax cuts at the corporate and the individual level, you'd
(04:31):
probably think that's nirvana for risk assets. But the reality is,
we had the shortfall implosion in twenty eighteen. You had
a near bear market almost by a tenth of a
percentage point for the SMP in the fourth quarter of
that year, and yeah, you bounced back in twenty nineteen,
was choppy but ended up being okay. But it doesn't
mean that you eliminate all of this downside risk, especially
if it's driven more by teriff related news and you know,
the hits to manufacturing in the US that are as.
Speaker 7 (04:53):
Sociating up the hits to manufacturing.
Speaker 5 (04:54):
If you look at the ISM Manufacturing index and put
a vertical line at the start of the trade war
in twenty eighteen, it went straight down. Now we're at
lows in manufacturing. So I don't know that we have
a potential implosion from these lows, but it could be
something that prevents what was the hope for pickback up
(05:15):
and manufacturing.
Speaker 3 (05:15):
I guess I keep thinking about you know, there's the
fundamental stories of companies and profits, right that really matters.
But then you've got a layer on top of that
the politics that's going to play out, and that's going
to kind of kick investors around.
Speaker 1 (05:27):
I mean, how are you guys squaring when.
Speaker 3 (05:29):
You're going to have a client call up and say, listen, fundamentally,
earnings growth is happening, but you know.
Speaker 5 (05:35):
He keep it if you're proxying or earning's growth at
the S and P level, that's obviously biased up the
cap spectrum. You've got forty three percent of the Wrestle
two thousand or nonprofitable companies, You've got a similar share
that zombie companies.
Speaker 7 (05:50):
So I think there's a there's a much.
Speaker 5 (05:52):
Wider spread, especially when looking on the cap spectrum.
Speaker 1 (05:56):
Okay, but it.
Speaker 7 (05:57):
Often gets masked by virtue.
Speaker 5 (06:00):
There's so much focus on the large cap indexes.
Speaker 3 (06:03):
Well, funny that you say that, because I feel like
the last two weeks everybody keeps coming on and said,
guess what, it's small caps turn again?
Speaker 5 (06:10):
So is it not monolithically Okay, again, when you look
at an index as large as a Russell two thousand
to sort of just blanketly say yeah, small caps look good,
I think that there is there are interesting zombie companies
that you said, Yeah, those are not those with not
sufficient cash flows to pay even interest on their debts.
So I think you know, our our thesis around factors
(06:31):
has been, yeah, there's opportunities down the cap spectrum, but
you don't want to sacrifice quality.
Speaker 1 (06:36):
Yeah.
Speaker 6 (06:36):
And to that point about quality, I mean, if you
just used positive earnings on a trailing twelve month basis,
so earnings of EPs above zero as your your you know,
only criterion for the Russell two thousand, and you took
all of those companies, you know, it's about eight hundred
nine hundred change as a group. On average, they're up
by almost forty five percent over the past years. So
(06:56):
there are pockets of small caps that have worked. It's
just not equally distributed because of the interest rate environment
we've been in, also.
Speaker 2 (07:02):
The growth environment.
Speaker 6 (07:03):
And by the way, all of these pops that you've
had in the wrest of two thousand from time to
time over the past couple of years, every time they
get a little bit of momentum and everyone thinks it's
changing for them, it hasn't been consistent with the turned
in forward earnings growth and expectations. So until I think
you see that actual move where conviction starts to build.
From an earning standpoint, it's tough to get bullish on
the index as a whole. But to Lezan's point about
(07:25):
you know a large chunk of it being now profitable
and zombie like, it's just tough at more.
Speaker 7 (07:29):
Than the Nasdaq.
Speaker 5 (07:30):
If you look at the top ten best performers this
year in the Nasdaq, none of them are large cap stocks.
They're all small yeah to me a none of them
are in the MAGS seven. So I think we get
in this sort of tunnel of the megacap tech and
tech related names, and there's less analysis happening on everything else.
Speaker 4 (07:48):
On an index level is an Are you concerned about
the power of those mega cap tech companies? It's a
question I could have asked five years ago, it just
wouldn't have included in Vidia.
Speaker 5 (07:56):
But I think the problem of concentration in the perceived
need to be in those names in order to do well,
that's an institutional problem, that's not an individual investor problem.
If you're benchmarked against a cap weighted index, you are
at the mercy of what those largest names their contribution
to the index. But for individual investors, they're not benchmarked
(08:19):
against the S and P five they don't have to
take that same kind of concentration risk. And it's another
point behind that. What I just mentioned of top ten
best performers in the Nasdaq, they're all small to mid
cap stocks. Only one of the MAGS seven is in
the top ten best performers of the S and P
five hundred. So I think you don't need to have
that concentration risk if you're not professionally benchmarked against.
Speaker 7 (08:43):
The S and P.
Speaker 3 (08:44):
What do you think are the biggest risks right now?
Do we have clarity on it for twenty twenty five.
Speaker 6 (08:48):
I mean, from a policy standpoint, that's probably the easy
one to throw out there. But I think just the
lack of clarity.
Speaker 1 (08:52):
Policy meaning government will also sand policy.
Speaker 6 (08:55):
More Washington policy, but I think they're tied together now. Yeah,
because I could see a scenario where if you do
get more restrictive labor force growth coming from the outside,
but also if there is a chunk of the labor
force physically removed from the country, that's probably an inflationary problem.
Speaker 2 (09:09):
And I've also yet to I love.
Speaker 3 (09:11):
That you guys are going there because I don't think
people realize. We certainly hear it from CEOs that they
are so worried that they're not going to have access
to a labor force and what that means their ability
to do things.
Speaker 7 (09:20):
And it's an increase in.
Speaker 5 (09:23):
The cost of labor costs, right, and it's a decrease
in labor supply.
Speaker 7 (09:28):
There's the demand side of that as well.
Speaker 2 (09:30):
I can shuck in a demansion.
Speaker 4 (09:31):
I can't get a CEO to seriously explain that that
will affect them at this point in the last two weeks,
even if they don't employ people who didn't come to
this country illegally. Right.
Speaker 5 (09:42):
How how often do you talk to smaller company CEOs.
Speaker 4 (09:46):
I recently, did you actually talk to me?
Speaker 5 (09:48):
I talked to you in the spaces where migrant work
is a large.
Speaker 1 (09:53):
Construction in hospitality, construction, restaurants.
Speaker 6 (09:57):
Almost twenty percent of the construction sector is undocumented.
Speaker 3 (10:00):
I have two brothers who are contractors. They're like, they
can't find work.
Speaker 4 (10:03):
But I think the important point is that it's not
just you could not You could run a company that
doesn't employ any undocumented workers, You're still going to see
labor costs rise if eleven million people are taken out
of this country who are doing work.
Speaker 1 (10:16):
That's right.
Speaker 6 (10:17):
Yeah, it's a demand shock, it's a supply shock, and
I think we sort of lose sight of the fact
on the demand side, especially because the supply side is
looked at maybe sometimes more of an issue in terms
of the makeup of a particular industry or the makeup
of the labor force. But if you're taking demand out
of the country, but you're also not being able to
fill the supply hole that you're leaving, that's sort of
(10:37):
a stagflationary shock.
Speaker 4 (10:39):
So what does it do to the market if that
policy ends up coming to fruition.
Speaker 6 (10:43):
Well, I mean, I think it's it depends if it's
phased over time.
Speaker 5 (10:46):
Yeah, and you know, we don't know the logistics around
whether we even possibly could get to the high end
of what the campaign pledges.
Speaker 1 (10:57):
The reality of that, right, But Peterson.
Speaker 5 (10:59):
Institute on if you guys saw it, just did a
study on okay, let's take it to the extreme, both
on the immigration side of things, on the tariff side
of things, and they actually added an interesting little wrinkle
into the mix. If there continues to be a threatening
of FED independence, all three of those collectively are unquestionably
higher inflation, lower growth.
Speaker 7 (11:20):
Kind of backdrop.
Speaker 5 (11:21):
Now we you know, the real answer maybe somewhere in
the middle of nothing gets done and the extremes both
on immigration and teriffs.
Speaker 1 (11:29):
But it's a wait and see.
Speaker 7 (11:30):
Mode, right.
Speaker 2 (11:30):
Yeah.
Speaker 6 (11:31):
Even on the tariff front, I've yet to see a model,
and all the research that we read, I've yet to
see them out of that doesn't suggest it's a stagflationary
shock where over time you get this boost to inflation,
but you also get a hit to growth.
Speaker 3 (11:42):
I want to go back to the market as kind
of a clearing house for all of the information, because
they do feel like the market smacks down policies or
initiatives very quickly. I feel like much more than it did.
I don't know ten years ago. Maybe it's because of
social media and stuff just piling through. Do you assume
that will continue and that will send messages to Washington
and maybe so that things aren't so severe.
Speaker 5 (12:04):
It will send messages. How much they're heated, that we
don't know.
Speaker 3 (12:08):
But especially when I think about the FED and the
independence of the FED, like that to me would be
something that would bring well to me.
Speaker 5 (12:13):
The most fascinating part of Palace press conference at the
most recent FOMAC meeting was the definitive no. As soon
as that happened, I thought, that's the headline, and that
should be the headline. So I don't worry about that
piece of it all that much. But all of this
gets to what we are One of our thesis is
(12:35):
that this sector dispersion, these rapid fire rotations that are
happening at the sector level, are going to persist. The
drivers going forward may be more specific to things like
tariff policy announcements, and we saw that in twenty eighteen
there was you know that that voting mechanism that happened
so quickly with markets maybe doesn't appear acutely at the
(12:58):
broad index level, but I think you're going to see
it at the industry level, at the sector level, tied
specifically to both tariffs and immigration sense.
Speaker 4 (13:07):
Hey, we're speaking with Lizene Saunders, Managing Director, chief investment
strategist at Charles Schwab on site at Schwap Impact, along
with Kevin Gordon, Director, Senior investment Strategist at Charles Schwap. Kevin,
I believe a year ago we were sitting here it
was October of last year at Philadelphia s and P
five hundred is up forty percent since our conversation with
a What a thunk?
Speaker 2 (13:27):
And what was interesting too?
Speaker 6 (13:28):
I remember talking to you guys about the unique nature
of this bull market, and at that point it had
been so unique where even for something like small caps
in the rustle of two thousand, it was breaking new
bear market lows and that has just never happened before.
You also had sectors in the SMP that had not
been up, and that that was just so unique about
what the structure was of the bowl in its early phases,
where typically even after you go through a non recessionary
(13:50):
bear you do tend to see a lot of participation
at any sector level, at any cap level, but we
just haven't seen that. But I will say, and what's
been nicer to see this year is that participation has
really improved, especially since that Midsummer mark where broad at
seven really started to take a little bit of a
step back, not outright decline, but take a step back.
Tech took a step back, even semiconductors. Recently, I find
(14:11):
that the weakening and that breadth profile actually just fascinating,
while the rest of the market has actually been able
to power forward. And that's I think what has actually
been lost in all of the election related narrative recently,
especially around some of the strength around areas like financials.
Speaker 2 (14:24):
Financials were strong heading into the election.
Speaker 6 (14:26):
Industrials were strong heading into the election, so it's not
as if you got this massive shift in the leadership
profile of the market. I think that's been a relatively
healthful all year.
Speaker 5 (14:34):
There's been massive churn under the surface of these cap
weighted indexes. So the Nasdaq had a thirteen percent draw
down in that Midsummer period of time, but the average
member draw down for the NASDAK is forty seven percent
year to date. So sometimes when people talk about the market.
(14:56):
It sort of begs, well, what piece of the market
are you talking about? These half weighted into right dangerous?
Speaker 6 (15:04):
Actually, and we've been calling for a good chunk of ear.
We're calling it the Michael Caine Duck market. You know,
just calm on the surface, the pattern like the tickens underneath.
That's that's been how we've been describing it.
Speaker 3 (15:13):
So does though, all right, so what's the environment for
twenty twenty five?
Speaker 1 (15:16):
Can you make a call?
Speaker 3 (15:18):
Well, we never make a call, okay, So I mean
I keep worrying what are we missing? We haven't had
a recession, we have had pockets of recessions, we've.
Speaker 7 (15:28):
Had the role through.
Speaker 1 (15:29):
How are we done with it?
Speaker 2 (15:30):
Then?
Speaker 5 (15:31):
You know, my hope was that we were going to
get to a point where if we started to see
weakness show up more acutely in the services sector, in
large part, probably driven by any further weakness in the
labor market, that, especially if the FED was an easing mode,
you might be in a position to see stabilization, if
not recovery in those areas that already taken their hits, like.
Speaker 7 (15:51):
Manufacturing, like housing.
Speaker 5 (15:53):
I don't want to say that's off the table now,
but it's a little bit more difficult post election to
come up with the case for stabilization and improvement in
those areas, especially if the FED doesn't stay in easing mode.
We saw this and tempted some recovery in housing, and
then it faltered again courtesy of the move up in
(16:13):
long yields.
Speaker 6 (16:14):
So I think the other thing too, from evaluation in
a sentiment perspective, is that you're getting pretty stretched across
most of the metrics that we track, and it's not
just in the traditional attitudinal how do you feel about
the market? You know, aaii bulbear indicator. It's now filtering
over into what are investors actually doing with their money.
We've seen equity ETF inflows completely spike akin to levels
(16:35):
that you saw a.
Speaker 1 (16:36):
Market funds too.
Speaker 6 (16:38):
Absolutely, yeah, So I think that becomes a little bit
more of a risk in the event there's a negative catalyst.
We always say sentiment for off. The sentiment and of
itself is not a reason that the market just goes lower.
It has to be tipped in that direction. It's just
the sentiment backdrop that makes things more proper.
Speaker 5 (16:50):
I also don't think we should look at the money
and money markets as some giant pool of imminent funds
dying to go into the equity market. I think that's
a lot of that is pretty sticky money.
Speaker 1 (17:00):
That's exactly.
Speaker 4 (17:01):
We get one trillion, two trillion, we'll go into the
avenue market. Well, last we just talked about US equities.
It's time to go global, which for many years has
lagged the US. Let's just go to the numbers here,
because over the last decade, the S and P five
hundred has on average returned thirteen zero point one five percent.
The footsy global all cap x US contracts stocks and
developed and emerging markets outside of the US that's only
(17:23):
returned about five point twenty five percent on average, a
difference of nearly one hundred and eighty percent over the
last decade, so some serious underperformance. It's been hard to
beat the US when it comes to equities gains this
year and this last decade. Here with the global view
and where there are opportunities around the world, we got
a Jeffrey clentp with us. He's managing director and chief
Global investment strategist at Charles Schwab. He joins us here
(17:44):
in San Francisco. Good to see you again. How are
you great?
Speaker 2 (17:47):
To be here. I'm doing fantastic. Thanks, thanks for being here.
Speaker 4 (17:49):
What's top of mind for you? Especially against a backdrop where, gosh,
every year it's like this is not international year.
Speaker 1 (17:55):
Yeah, no, you're not alone.
Speaker 2 (17:56):
People.
Speaker 1 (17:57):
You have time to buy internationally well.
Speaker 8 (17:59):
And it's for a couple of good reasons too, right,
I mean, the obsession with AI and stocks like Nvidia
have just really been focused on the US market, and
tech has been the best performer in the US, and
tech is the biggest sector in the US and it's
not elsewhere. The other thing is that those other economies
have been lagging US economic and earnings growth.
Speaker 2 (18:17):
That could be different next year though.
Speaker 8 (18:19):
We're actually already seeing a shift towards financials leading markets overseas.
That could be the next step for the US as well,
big break cup beneficiary. In addition, we're seeing global economic
growth finally begin to converge. US and China expected to
slow next year, but Europe, Japan, Canada, Australia all expected
to pick up economic momentum next year, along with earnings growth.
(18:40):
As a matter of fact, here in the third quarter,
we're just getting done with the earnings reports. Earnings growth
for European companies actually outpaced the SMB five hundred for
the first time in five or six quarters, so.
Speaker 2 (18:49):
We may be starting to see a turn there.
Speaker 3 (18:51):
But what are you seeing in terms of flows, because
it does feel like investors are still holding back and
just kind of all in on the US trade.
Speaker 8 (18:57):
They are in post election. I think a lot of
investors believe, hey, we just had an election. I probably
need to make changes in my portfolio. But they can
be detrimental. Think back to twenty seventeen, right, So, coming
out of the twenty sixteen election, America First policies were
thought to really help US small caps and really hurt
emerging markets. The exact opposite occurred to emerging markets were
the best performers in twenty seventeen, small cap US the worst.
(19:19):
So not saying necessarily it's a perfect play again a repeat.
Speaker 2 (19:24):
Of all that, but the flows can be misleading.
Speaker 3 (19:27):
What happened last year, because we were thinking about our
conversations that we had with you and some of the
other members of the SHWAP team.
Speaker 1 (19:32):
You were bullish on internationals. What happened last.
Speaker 3 (19:35):
Year that you think okay was a surprise or just
why it didn't pan out, or you misread.
Speaker 2 (19:40):
The tea leaves well a few different things.
Speaker 8 (19:42):
One, I think the technology thing has just run longer
and harder than I thought of what I thought we'd
see a broader trade in particular exactly, yeah, and so
we didn't see that broadening. I think we're starting to
see some of that now, but we just didn't. The
other thing was we did see a stumble in the
manufacturing recovery. So I was basing this on a what
I call it a cardboard box recovery, that demand for
making things and shipping things would would pick back up again.
(20:05):
It did in the first half of the year, it
rolled over sharply in the second half, and the Global
Purchasing Managers Index for manufacturing back below fifty. I think
that usually as a lag with Central Bank policy of
about nine months. We're at the turning point there where
I think that starts to pick up next year. So
I think it is delayed and not disrupted.
Speaker 4 (20:21):
Where do tariffs come into this equation? Boy, this is
a tough one. If you're thinking internationally, you're saying, wait
a second, Okay, we get this America First policy coming
once again, starting in you know, January twentieth. There's a
lot of Republicans in Congress right now who look like
they're ready to help the president elect to push through
that agenda. What do you do if you're an investor
(20:42):
outside of the US and you're saying to yourself, wait
a second, these companies outside the US could be hit
with tariffs.
Speaker 2 (20:46):
Yeah, and the numbers are scary.
Speaker 8 (20:48):
Sixty percent on China, twenty percent across the board, two
hundred percent on John Deer tractors coming from Mexico. If
you add them all up and I have, and you
wait them by their import percentages, you get a twenty
six percent an import tariff in the US on average.
That's up from two point six right now. That's like
smooth Hally level great Depression era level tariffs. But I
(21:08):
think the reality is going to be quite different from that.
I'd look as an example in Europe. So Europe on
October twenty eighth, just slapped forty five percent tariffs on
electric vehicles from China.
Speaker 2 (21:17):
Within two days.
Speaker 8 (21:18):
Chinese delegates where they are working out a way to
get rid of those, they seem to make some technical
progress over the last couple of weeks, maybe scrapping those
tariffs in favor of import quotas, which is a far
less disruptive way of doing things. So I think that's
probably maybe a way we can look at what the
future path of tariffs might look like.
Speaker 3 (21:32):
Jeff, how do you think about the pushback in globalization?
We have a lot of CEO say, listen, it's not
going away. Yes, supply chains are changing or bringing do
more nor shoring or on shoring. But I'm just curious
how what's going on in globalization wars around the globe,
how that is impacting the international investment play.
Speaker 8 (21:52):
So it seems like there are multiple supply chains now
instead of just one. Right, So you don't just assemble
your product in the cheapest labor market, You're going to
have to multiple supply chains.
Speaker 2 (22:00):
That seems to be what's happened.
Speaker 3 (22:02):
Is that good for companies, costs their earnings there, what
their balance sheets look like, for their investment potential.
Speaker 8 (22:07):
But it's less efficient, so it should be more costly.
At the same time, we've been able to miniaturize manufacturing
globally in a way that's made it not as inefficient
to have multiple supply chains as it used to be.
And with perhaps AI robotics, a number of these potential innovations,
we could maybe scale that even further to where it's
less of a dragon corporate profit.
Speaker 4 (22:27):
Interesting. Okay, So how do you see this happening outside
of the US versus inside the US? If we're if
we're thinking about the companies that are doing this type
of innovation, who are the beneficiaries here?
Speaker 8 (22:36):
Well, I mean, you know, I think it's those that
are really looking to scale up their productivity per worker.
So you're looking at healthcare, You're looking at financial services.
Those are two areas very much more representative outside the
US than inside the US. So the potential for productivity
gains I think are skewed to those businesses. Financials are
the biggest sector outside the US, and there's a whole
(22:56):
lot that can be done.
Speaker 2 (22:57):
With AI there.
Speaker 3 (22:58):
All Right, we know you don't do individual stocks, but
when you look around the world, then I do feel
like I just want to talk some regions. I think
about Japan, and I do feel like the momentum this
year has definitely changed on Japan. Give us kind of
your thoughts about what we see in twenty twenty five.
Speaker 8 (23:11):
So I think you see radhikes from the Bank of Japan,
and so I think that begins to bring some strength
back to the end and we start to see some
capital come back to.
Speaker 2 (23:21):
Japan.
Speaker 8 (23:21):
We've got a number of businesses really ramping up their
share buybacks and their dividends, and so the return to
shareholders seems to be picking up. And so if we
get a manufacturing recovery, that's what Japan does. And so
if we get that global manufacturer recovery, I think that
does disproportionately benefit SPAN.
Speaker 3 (23:37):
What about Europe in terms of wars and stuff, So
what's the kind of smart I hate to put everything
in a bucket because I don't think that's fair. But
what are you thinking about for twenty twenty five in
terms of where are the pockets of opportunities in particular
for investors and where maybe not so much.
Speaker 8 (23:51):
You know, One of the things I think Europe might
look to do is buy US weapons to fund the
war in Ukraine, to narrow the trade deficit with the US,
avoid across the board tower and actually achieved maybe their
objectives in keeping Russia at bay. One of the things
I think it's interesting is European automakers. They could be
in the crosshairs of Trump tariffs. Right the stocks fell
seven to nine percent right after the election, But they've stabilized,
(24:13):
they've started a rebound because I think if you look
at what's likely to occur, maybe we go from a
two and a half percent tariff on Europeans cars to
ten percent that will be equivalent to the US tariff.
That's seven and a half percent increase in tariffs has
already been offset by the fact that the dollars up
five percent versus the euro right, So we've already kind
of adjusted for some of those factors, and I think
therefore that seven to nine percent to climb in those stocks.
Speaker 2 (24:36):
Maybe for the reverse is.
Speaker 4 (24:37):
Your what is the region of the world where you're
most optimistic.
Speaker 8 (24:40):
I think it probably is Europe. One thing, because price
arnings ratios are pretty attractive. They're below their ten year average.
Speaker 1 (24:46):
Such a great good deals valuation.
Speaker 8 (24:48):
Yeah, I mean, take a look at difference between Coke
and Nestley. Nestley trading at a four pe discount to
Coca Cola. They have literally the same customers and operations
around the world, which you're paying a big premium for
Coke because the investor base is different. So I think
that comes back. I think earnings growth does pick up
next year. We're already starting to see signs of that.
And then five rate cuts by the ECB by June
of next year versus maybe two for the FED. I
(25:09):
think that ease if financial conditions, really does help to
support that rise.
Speaker 3 (25:12):
And I'm glad you went there because I do think
a lot about the differences in central bank policy right
based on their specific outlooks and what that gap means
in terms of opportunities for investors. And you're saying that
spread between what Europe does in terms of monetary policy
versus the US could provide opportunity.
Speaker 8 (25:26):
It's a drag on their currency versus the dollar. Obviously
the dollar we go up, but maybe that's a few
percentage points. Each point of pe expansion in Europe from
fourteen is a seven percent gain on prices, So you
get one or two of those, and that's going to
outweigh anything you're going to get in terms of currency drag.
Speaker 4 (25:42):
I want to go back to Carol's question about the war,
because if you are most optimistic about Europe, how do
you factor that into how you're thinking about the region,
Because there is a chance that with the incoming Trump
administration and the rhetoric around how they want to support
Ukraine or they don't want to support Ukraine, that there
(26:02):
could be a risk of that war ending in Ukraine losing.
Speaker 8 (26:07):
There certainly is a lot of uncertainty, of course, the
next year in terms of where they draw borders into
sometimes cease fire agreement, and in anticipation of that, both
sides trying to you know, gather territory and try and
redraw those lines. Ukraine is funded through twenty twenty five.
Most governments have already committed those resources. There's a lot
of weapons on the way, So the whole idea of
(26:28):
a day one ceasefire probably doesn't seem likely. But somewhere
over the course of the year perhaps where those lines
are drawn, I don't know, but I do believe that
there's going to be a lot more spent in terms
of defense in Europe and that could have some stimulative aspect.
Speaker 3 (26:40):
Jeff, you know, we've all been doing this a long
time and seen a lot of different market cycles, and
I'm just curious how you're thinking about, you know, the
investment environment for the international play or global play today
versus kind of where it was a few years ago.
Is it more difficult is it more transparency.
Speaker 1 (26:58):
Give me some thoughts on that. You've seen a lot
of market cycles.
Speaker 2 (27:01):
Yeah, it's so this one is so much tied to sectors.
I think.
Speaker 8 (27:04):
So the US is basically a tech ETF and nothing wrong.
Speaker 2 (27:08):
With that, it's just recognizing it.
Speaker 8 (27:10):
But there are other countries that align with a particular
sector as well. You know, Germany is an AUTOETF, Australia
is a metals and mining ETF, a Canada's a financials ETF.
So if you think about sector diversification, you may love
the US, but honestly, it's a tech ETF. So if
you want some sector diversification, move away from just what
has become really kind of a really concentrated AI play.
You need that international diversification in your portfolio. And that's
(27:32):
a different way of thinking about it that maybe.
Speaker 4 (27:34):
In the past thirty seconds on China.
Speaker 2 (27:37):
China is very likely to slow next year.
Speaker 8 (27:38):
They're not allocating the resources to the consumer and to
the property market. It's still a strategic focus on self
sufficiency and semiconductors and so many other things.
Speaker 2 (27:46):
So slower growth but not really rebounding.
Speaker 4 (27:50):
What type off would it be?
Speaker 1 (27:51):
Yeah, what.
Speaker 2 (27:55):
At this point, maybe an infrastructure ETF.
Speaker 3 (27:57):
Yeah, do you still feel like we're lacking transparency? China
just got about twenty seconds.
Speaker 2 (28:02):
I think it's getting better.
Speaker 8 (28:03):
I don't think they have the same incentives to create
the same type of economic data that we create in
the West.
Speaker 3 (28:08):
Yeah, all right, great stuff, Thank you so much. Around
the world, we went well done.
Speaker 1 (28:12):
Well done.
Speaker 3 (28:13):
Jeffrey Kleinapp, managing director, a chief global investment strategist at
Charles Schwab. Right here at Schwab impact bond investors searching
for some direction today. This is you know, there's so
many factors. You've got Russia's escalation of warfare and Ukraine.
You've got the Murphy Murky outlook, excuse me for what
the Fed's going to do in their interest rate cut
policy going forward. And then there's the leadership of the
(28:35):
US Treasury Department. There's a lot of dynamics very important
to the treasury trade going on right now.
Speaker 4 (28:39):
Yeah, they're also traders thinking about, okay, what's the FED
going to do for the remainder of the year and
next year. Well, we got two great voices who focus
on fixed income strategy at Schwab with us now Kathy Jones,
Managing director, fixed income strategist and Colin Martin, director of
Fixed income Strategist. Good to have you both with us.
Speaker 2 (28:55):
How are you good?
Speaker 7 (28:57):
Little tired?
Speaker 1 (28:57):
Been a big busy week, but nothing going on in
the treasury trade this year kind of thing.
Speaker 4 (29:03):
Well, I want do you want to start with you, Kathy,
and how you're thinking about what the FED is going
to do and if that changed it all given the
election results a couple of weeks ago.
Speaker 9 (29:12):
Yeah, I think the case for a pause is growing
a bit stronger at this stage of the game. So
you know, we've had stronger than expected economic data now
for a while, particularly like the retail sales telling us
the consumers doing well, and so then the question is
does a FED.
Speaker 1 (29:28):
Really need to cut rate to help out?
Speaker 9 (29:32):
We have very easy financial conditions as the stock market
keeps going higher and credit spreads get tighter and so
you know, and then we have all the uncertainty about
what fiscal policy will be going forward, so we don't
know what tariffs will or won't be imposed, We don't
know what tax policy will be, how it will affect
(29:55):
both the economic.
Speaker 1 (29:56):
Growth big like if list or what might happen.
Speaker 9 (30:00):
And then immigration reformist, I particularly think is one of
the most important components for inflation and growth going forward,
because again we don't know what the actual policy will be,
but if you kind of take things at face value,
that could reduce the workforce by seven or eight percent.
That's a huge, huge issue.
Speaker 3 (30:19):
So Colin, you guys, you guys, you and Kathy have
to figure out though fixed income strategy and what you're
thinking about. Right people look to you to kind of
get an idea of what's to come maybe in twenty
twenty five. So what do you feel comfortable kind of
saying right here on this Thursday after NU about that.
Speaker 10 (30:33):
Yeah, Well, we've kind of revised our guidance a little
bit lately because of so many of the uncertainties that
Kathy just highlighted, where there's this wide range of outcomes
because of the proposed policies, what gets implemented, when they
get implemented, and what that impact is. So given that,
and given the I think the risk is to higher
yields than lower yields if we do get some sort
of inflationary impact. So our guidance now, our main guidance
(30:55):
for investors is to really focus on a benchmark or
below benchmark average duration. I don't think it makes a
lot of sense to dive in with long term bonds
right now because of the rest of those prices if
they fall. I want to make it clear though, that
that's a tactical idea. From a strategic standpoint, we still
think the yields are pretty attractive. So if you're an
investor you're looking for for five six percent yields, you
(31:16):
can get that right now, if you have that time horizon,
and if if that's going to help you reach your goals,
then I think that's really attractive right now.
Speaker 1 (31:23):
But just be prepared that if we see yields in.
Speaker 10 (31:26):
Shop when we talk about our upside, maybe maybe we
go to five percent on the ten year treasure yield.
Speaker 9 (31:31):
But maybe likely possibly possibly yes, okay, to all three.
Speaker 2 (31:36):
Yeah.
Speaker 9 (31:38):
So you know what we do is you try to
model out we deconstruct the tenure yield. Then we try
to model out, well, if we change this component, what
happens in that component?
Speaker 7 (31:47):
Or if you just look at the spread.
Speaker 3 (31:48):
There's a lot of components to play around with, right, yeah, exactly,
and or you just look at the spread between the
Fed funds rate and tenure yields.
Speaker 9 (31:56):
Historically it can be a you know, one hundred to
one hundred and fifty base point. So if the FED
can't go below four percent, you could easily get to
five percent plus just based on history. But we do
think the FED will get below four percent by some amount.
Speaker 1 (32:12):
But again, a lot of ifs in.
Speaker 9 (32:15):
There, and so we're just trying to be as cautious
as we can right now without giving up too much income.
Speaker 4 (32:21):
Hey, Colin, play that scenario for us, if we do
hit five percent on the ten year, what that looks like,
What the implications of that are for the economy? And
I mean I think a lot about different areas of
the market that have expected lower interest rates. If we
don't get those, what happens.
Speaker 7 (32:36):
So I think what it looks like.
Speaker 10 (32:37):
I think it looks attractive, and I think if we
get there, I think that can draw in a lot
of demand. I think whether it's domestically or internationally, I
think there'd be a lot of demand, especially that we're
seeing these interest rate differentials. We're seeing other central banks
expected to cut more than the US. I think that's
number one to what happens to the economy and to
barrow wers. I think it's more of a mixed bag
right there, because if you look at both the consumer
side of the equation and what I focus on in
(32:59):
the corporate bond market, corporations just haven't really had that
negative impact of rising interest rates. Something I've looked at
recently as why so because they because they did the
same thing that that homeowners did.
Speaker 1 (33:10):
They refined, right, they refined.
Speaker 10 (33:12):
So if you look at I'll use high yield bonds
for example.
Speaker 1 (33:14):
The average which is having a moment.
Speaker 10 (33:16):
They're having a moment. Spreads are at you know, the
fifteen year lows. The average coupon rate. Now that's there
can be high or lower. The average coupon rate of
that index's right where it was in twenty nineteen. It's
risen a little bit over the past year or so.
But because companies just refinance. So if rates keep rising
from here, although the trend is the opposite right now,
but if they were to move up a little bit,
that would impact the leveraged borrower. But for the most part,
(33:40):
their fundamentals are pretty strong.
Speaker 1 (33:43):
So the opportunity.
Speaker 3 (33:45):
So when you know someone comes to you and says, so,
where are the best opportunities right now? If I have to,
I want to put some money in the fixed income area, Kathy,
what do you say.
Speaker 9 (33:53):
Well, again, if your time horizon is five years plus
and you're willing to kind of ride out the ups
and downs, you're looking at five to five and a
half percent yields without taking much credit risks.
Speaker 1 (34:03):
So I'll see their investment great corporate bond at treasuries
and mbfs.
Speaker 9 (34:08):
If just look at the egg, your total return is
going to be pretty attractive and your income stream is
going to be important. So keep in mind, you know,
we had a rocky period in twenty twenty two because
there was no coupon income. We're coming off zero now
we're starting with coupons, you know, close to five percent.
Speaker 1 (34:26):
That keeps your return much more solid going forward.
Speaker 9 (34:29):
So we like higher credit quality in general, but definitely
lots of places to lock in that yield.
Speaker 1 (34:36):
How oh go ahead?
Speaker 7 (34:37):
Oh you got.
Speaker 4 (34:38):
I wanted to talk a little more macro and think
about policies come January, because Kathy, you mentioned a lot
at the top when it comes to labor market, when
it comes to tariffs. Do you believe these policies are
actually likely to be implemented given that they actually could
have severe economic consequences.
Speaker 9 (34:52):
I have no idea, and I will be honest with you,
because we know that one thing that President elect Trump
has has has been in favor of it forever's tariffs.
So we do believe pretty strongly there'll be some sort
of tariffs. Now, will they be modified, Will will industry
is affected by the tariffs be subsidized as they were
in his previous administration with the farmers. We don't know
(35:15):
the details of that, but tariffs seem very likely after that.
Really hard to say, you know, tax policy and immigration,
hard to say what.
Speaker 1 (35:24):
Will really happen? Just got about thirty seconds.
Speaker 3 (35:26):
Is there a moment in time that you're thinking, Okay,
maybe six months from now, eight months from now will
much more clarity about what this new administration can get
done and we can be more definitive in terms of
our thinking about going forward. Is there a timeframe that
you're thinking about for next year?
Speaker 9 (35:40):
Yeah, I think when they actually have to debate the
Tax Cut Act that was previously that will be expiring,
then we should get a better idea of what Congress
is willing to do.
Speaker 10 (35:53):
Final thought from you, Yeah, no, I would agree. I
think I think yes, we'll have more clarity just because
more time will have passed, but I think we're going
to have a lot of uncertainty over the next year,
two years, four years. So yes, more clarity, but not
all the answers that we're going to need.
Speaker 1 (36:07):
Keeping us on our toes again.
Speaker 3 (36:10):
Thank you both so much, so appreciate what we could
kind of finish up with the Fixed in Coventry. It's
been such an important one, no doubt about it, and
something we've been following so closely. Kathy Jones, Managing director
of Fix Comes Strategist, Colin Martin, Director of Fiction in
Comes Strategist.
Speaker 1 (36:21):
Right here at Schwab Impact
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