2019 Outlook Three experts discuss the year ahead in markets, trade policy and more - Charles Schwab
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STRATEGI ES & I DEAS FOR T H E Above-the-Line When to Sell Digital
C HAR L ES SC H WA B COM MUNI T Y
SP R I NG 2019 Deductions Page 26 Self-Defense
Page 7 Page 34
2019 Outlook
Three experts discuss the year ahead
in markets, trade policy and more.
Page 13
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CC2265544 (0119-8ZZD) ADP104264-00 (10/18) 00217734
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Spring 2019 CONTENTS
5 13 26 34
D E PA R T M E N T S F E AT U R E S
2 SCHWAB ORIGINALS PERSPECTIVES 26 When to Sell
What to watch, listen to and 13 Three Schwab experts share Whether you’re up or down,
follow now. their market outlooks for 2019. here’s how to know when to
shed an investment.
18 Recent changes to the Global
3 CEO’s NOTE Industry Classification Standard
Look past the present. may impact your investments. 32 Secrets of
By Walt Bettinger By Brad Sorensen Self-Improvement
Choiceology® host
Katy Milkman on how to
THE BOTTOM LINE 20 THE BIG PICTURE make more rational decisions.
5 Don’t let health care costs ruin Who’s afraid of a 500-point
your retirement. drop in the Dow?
34 Digital Self-Defense
7 Six deductions you may be Seven ways to help protect
able to take—even if you don’t 23 TRADING yourself online.
itemize. Get acclimated to volatility with
exchange-traded funds.
8 How to protect your tax return By Randy Frederick
from scammers.
9 What’s the difference between 38 SPOTLIGHT On Investing (ISSN 1523-5327) is published
quarterly. This publication is mailed at Standard
business and market cycles? Portfolio Builder tool; Schwab
A postal rates. ◆ If you prefer not to receive
Mobile app; travel notices. On Investing, please call 888-484-5340.
◆ POSTMASTER: Send address changes to On
11 ASK CARRIE Investing, Charles Schwab & Co., Inc., P.O. Box
982600, El Paso, TX 79998-2600. On Investing
Keeping a lid on student debt. 44 ON YOUR SIDE does not assume any liability resulting from
By Carrie Schwab-Pomerantz Cutting taxes down to size. actions taken based on the information included
By Charles R. Schwab in this magazine. Mention of a company or
security does not constitute endorsement.
Some contributors to On Investing may have
active positions in securities or companies
discussed in this issue. MAG105672Q119-00
O N T H E C O V E R : I L L U S T R AT I O N B Y S I M O N E M A S S O N I SPRING 2019 | ON INVESTING | 1
SCHWA B ORIG IN A L S
Watch Listen
A Schwab client’s chance encounter with a In Financial Decoder™, a new podcast from
legendary artist suffering from Lou Gehrig’s Schwab, Mark Riepe, head of the Schwab Center
disease led to the founding of Not Impossible Labs, for Financial Research, shares strategies designed to
which is using technology to tackle some mitigate your internal biases and help improve the
of humanity’s biggest challenges. Watch the way you approach financial decisions. Listen and
powerful story unfold at ownyourtomorrow.com. subscribe at schwab.com/financialdecoder.
Learn Follow
Fixed income @kathyjones
International @jeffreykleintop
Investing @charlesschwab
Markets and economy @lizannsonders
Personal finance @carrieschwab
Research @schwabresearch
Successfully juggling multiple goals can be tough. Trading @randyafrederick
But the secret isn’t: It’s a lot easier to get where
you’re going when you’ve got a plan. Learn more at
schwab.com/chartyourfuture.
0219-8UW4
Board of Advisors Editorial Staff
Andy Gill Helen Loh Leila Chism Sara Smith
Executive Vice President, Senior Vice President, Vice President, Editor in Chief
Chief Marketing Officer Content & Client Marketing Media
Jeremy Hartley
Joe Carberry Mason Reed Tamar Dorsey Managing Editor
I L LU S T R AT I O N S B Y D R U E WAG N E R
Senior Vice President, Senior Vice President, Vice President,
Corporate Communications Brand & Corporate Brand Journalism Stacia Miller
Marketing Services Associate Managing
Greg Gable Chandra Stanley Editor
Senior Vice President, Mark W. Riepe, CFA® Vice President,
Office of the Chairman Senior Vice President, Digital Marketing
Schwab Center for
Financial Research
2 | C H A R L E S S C H WA B | SPRING 2019
CEO’s NOTE
Look Past the
ecisions made in the heat of the Research found that investors who
D moment can have a big impact missed just the top 10 trading days of
Present
on our lives. 2009—a very volatile year for stocks—
Selling when markets get rocky is a would have fared worse than those
prime example. Periods of uncertainty who stayed invested through the ups
When markets are churning, can tempt us to make decisions that and downs.1
keep your eyes on the big fly in the face of our goals. An analysis Market swings are an inevitable—
picture. by the Schwab Center for Financial and uncontrollable—part of investing.
What is within our control is how we
react to the ups and downs. By sticking
to your plan and ignoring the day-to-
By sticking day buzz of the market, you’re less likely
to your plan, to make irrational decisions that could
you’re less upend your goals. And if you ever need
help putting together a plan that will
likely to upend serve you in good times and bad, we’re
your goals. always just a phone call or click away.
Sincerely,
Walt Bettinger
President & CEO
See page 42
for important
information.
(0219-8P9L)
1
Schwab Center for Financial Research with data from Morningstar. Example compares two hypothetical $100,000 investments made on 01/01/2009. One
portfolio remained invested for the full year. The other missed the top 10 best-performing days of the year. Market returns are represented by the S&P 500®
Index, and top days are defined as the best-performing days during 2009. The year began on the first trading day in January and ended on the last trading
day of December, and daily total returns were used. Returns assume reinvestment of dividends. Fees and expenses would lower returns. When out of the
market, cash is not invested. Past performance is no guarantee of future results.
SPRING 2019 | ON INVESTING | 3
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mortgage servicing company, surveyed in March – April 2017. Your experiences may vary. Visit JDPower.com.
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00218465
CONTENTS RE TIREE HEALTH CARE | ABOVE-THE-LINE DEDUCTIONS | TAX-RETURN FRAUD | AND MORE
Spoiler Alert
edicare isn’t a perfect shield against unexpected
M health care costs in retirement. Indeed, health-
related expenses accounted for three of the top five financial
How to help stop health shocks cited in a recent survey of retirees.1
care costs from ruining your “Most people know that Medicare is there for
retirement. them starting at age 65, but they may not under-
stand as much as they could about the coinsur-
ance, copays, deductibles, premiums, options and
rules—and of course what’s not covered at all,” says
I L LU S T R AT I O N B Y A L B E R T T E R C E R O
SPRING 2019 | ON INVESTING | 5
T H E B OT TO M L I N E
Rob Williams, vice president of finan- Uphill battle
cial planning at the Schwab Center for Health care costs have increased nearly fivefold since 1970—putting many
Financial Research. “Even under the retirees at risk.
best of circumstances, Medicare won’t
cover everything.” $12,000
Here are four ways to help ensure
Total annual health care expenditures
you don’t come up short.
$10,000
per capita (in 2016 dollars)
Consider Medigap …
$8,000
This private insurance supplements
Medicare Part A, which covers hospi- $6,000
talization, and Medicare Part B, which
covers doctor visits (the two parts $4,000
together are sometimes referred to as
Original Medicare). There are currently $2,000
10 Medigap plans standardized by
the government, though prices vary
$0
depending on where you live (check
1970
1980
1990
2000
2010
2016
medicare.gov for pricing).
Depending on which option you
Source: Kaiser Family Foundation with data from the Centers for Medicare & Medicaid Services.
choose, Medigap can reduce or elimi-
nate copays, coinsurance and deduct-
ibles and limit your out-of-pocket costs.
It may also provide limited coverage
when traveling outside the United
Once you enroll in health care costs—which have escalated
exponentially in recent decades (see
States. Once you enroll in Medicare, Medicare, you have a six- “Uphill battle,” above)—can vary widely
you have a six-month open-enrollment month window during depending on individual circumstances,
window during which to buy a Medigap including your place of residence.
plan without preexisting conditions
which to buy a Medigap
affecting cost or eligibility. plan without preexisting Do your homework
… or Medicare Advantage
conditions affecting cost Check medicare.gov for more details
or eligibility. about what’s covered by Medicare,
Also known as Medicare Part C, Medigap and Medicare Advantage. Rob
this private insurance replicates the recommends you explore your options
benefits of Original Medicare and is closer to retirement—but well before
often less expensive but restricts you you reach age 65, so there’s still time to
to certain doctors and hospitals, much include drug coverage (under Original plan ahead and, if necessary, boost your
like a health maintenance organization Medicare, you must sign up for a stand- retirement savings to guard against any
(HMO) or preferred provider organiza- alone prescription drug program, unpleasant surprises.
tion (PPO) does. known as Medicare Part D). “Socking away money in a Health
If you have Medicare Advantage, Savings Account, if available to you,
you don’t need—and shouldn’t pur- Budget for out-of-pocket costs can be especially effective,” Rob says.
chase—Medigap. That said, Medicare That’s because contributions are tax-
Advantage may offer benefits that Medicare Part B, Medigap, Medicare deductible, earnings are tax-free and
Original Medicare plus Medigap do Advantage and Part D drug coverage withdrawals are also tax-free if used for
not, such as basic dental, hearing and each come with their own costs. And qualified medical expenses—including
vision care, and even fitness benefits. even with drug coverage and basic Medicare (though not Medigap) premi-
Most Medicare Advantage plans also dental, hearing and vision care, you can ums and out-of-pocket costs.
NEXT still be on the hook for health care costs
STEPS that aren’t covered by insurance.
1
Society of Actuaries 2015 Risks and Process of
Retirement Survey, 01/2016.
Schwab recommends budgeting
Need help planning for health care costs in $450 to $600 per month per person
retirement? Visit schwab.com/advice to see all as a starting point to cover premiums See page 42 for important information.
the ways Schwab can help. and out-of-pocket expenses. However, (0219-8ZT5)
6 | C H A R L E S S C H WA B | SPRING 2019
Walk the Line
n Health Savings Account (HSA)
contributions: Regardless of income,
HSA contributions are fully deductible
Even if you don’t itemize, up to the annual contribution limits:
you may still be eligible for $3,450 for individuals ($3,500 in 2019)
above-the-line deductions. and $6,900 for families ($7,000 in
2019), plus an extra $1,000 for those
he Tax Cuts and Jobs Act nearly ages 55 and older.
T doubled the standard deduction.
As a result, 28.5 million fewer Americans For the self-employed
are expected to itemize for 2018.1
That said, even taxpayers who don’t n Health insurance premiums:
itemize for 2018 may be eligible for one Individuals can deduct 100% of their
or more above-the-line deductions— health insurance premiums, up to the
that is, expenses that can be subtracted total annual profit from the business.
from your gross income before you However, those who have multiple
calculate your taxable income. businesses must choose only one busi-
ness when determining deductibility.
For savers
n Retirement plan contributions:
n Traditional Individual Retirement Annual contributions to SEP IRAs,
Account (IRA) contributions: Depending SIMPLE IRAs and solo 401(k) plans are
on your situation, you may be able to generally 100% deductible up to the
deduct some or all of your contributions contribution limits. Plan limits vary,
to a traditional IRA (see chart, below)— however, so be sure to consult a tax advi-
up to the annual maximum of $5,500 sor for help determining deductibility.
($6,000 in 2019), or $6,500 for those ages
50 and older ($7,000 in 2019). n Self-employment tax: Those who are
self-employed must pay the employee
and employer portions of their Social
Security and Medicare taxes (12.4%
Full deduction allowed if: Partial deduction allowed if: and 2.9%, respectively). However, the
IRS allows you to deduct 50% of the
Single • You earned less than $63,000 • You were covered by an total from your personal tax return.
($64,000 in 2019) or employer-sponsored retirement
plan and you earned between For students
• You were not covered
$63,000 and $73,000 (between
by an employer-sponsored
$64,000 and $74,000 in 2019)
retirement plan n Student loan interest: Individuals
can deduct up to $2,500 in student
Married • You earned less than $101,000 • Both you and your spouse loan interest, provided their modified
filing ($103,000 in 2019) or were covered by an employer- adjusted gross income is less than
jointly* sponsored retirement plan and $65,000 for single filers or $135,000 for
• Neither you nor your spouse you earned between $101,000 married couples, at which points the
was covered by an employer- and $121,000 (between $103,000
sponsored retirement plan deduction begins to phase out.
and $123,000 in 2019) or
• Only your spouse was covered You may be entitled to other above-
by an employer-sponsored the-line deductions not listed here, so
retirement plan and you earned
be sure to check with a tax professional
between $189,000 and $199,000
before filing your return.
(between $193,000 and 203,000
I L LU S T R AT I O N B Y A L B E R T T E R C E R O
*Income limits are for combined earnings. in 2019)
NEXT 1
Tables Related to the Federal Tax System as in
Effect 2017 Through 2026, United States Con-
STEPS gress Joint Committee on Taxation, 04/23/2018.
Ready to get a jump on your taxes? See page 42 for important information. ◆ This information does not constitute and is not
intended to be a substitute for specific individualized tax, legal, or investment planning advice.
Log in to schwab.com/taxforms to download Where specific advice is necessary or appropriate, Schwab recommends consultation with a
the 2018 forms for your Schwab accounts. qualified tax advisor, CPA, financial planner, or investment manager. (0219-8ZU1)
SPRING 2019 | ON INVESTING | 7
T H E B OT TO M L I N E
Tax Return Identity Theft
How scammers target taxpayers—and what to do about it.
file an identity-theft report with
the Federal Trade Commission at
identitytheft.gov.
n Add protection: Certain taxpayers
can request a six-digit Identity
Protection PIN from the IRS as an
added layer of protection for tax
filings. Visit the IRS website for
more information about eligibility
requirements.1
If your refund check is improp-
erly issued to someone else, the
fraudster’s next step will likely be to
deposit it into an account illegally
opened in your name. Freezing
your credit account with each of the
three consumer credit–reporting
agencies can help keep unautho-
rized financial accounts from being
established (see “Digital Self-Defense,”
page 34).
Your financial institution may also
be able to help. Banks and brokerage
houses, including Charles Schwab,
work with the IRS to help reduce
tax-related identity theft. In 2017
alone, such firms helped recover
144,000 refunds totaling some $204
magine going to the trouble but filing early can deprive scammers million.2
I of filing your tax return only of the time they need to file a fraudu- “We work closely with the IRS
to discover that an identity thief had lent return in your name. to identify potentially fraudulent
beaten you to it. Fraudsters using false accounts and deposits, with large IRS
identities pocketed at least $1.6 billion n Don’t take the bait: A common form refund checks given special scrutiny,”
in tax refunds in 2016, according to the of tax-related identity theft starts with says Carol Sniegowski, managing
Government Accountability Office, a fraudster requesting personal infor- director of fraud investigation at
and the IRS confirmed almost 600,000 mation or even a tax payment over Schwab. “When we can prevent stolen
cases of fraudulent returns in 2017. the phone or via email. Don’t fall for refund checks from being deposited,
What can taxpayers do to help pro- it—IRS policy forbids personnel from we help thwart theft and reduce
tect themselves? Here are some tips: requesting financial or other personal the time necessary to get warranted
information over the phone or via refunds to the appropriate person.”
n File early: File your taxes right email, text or social media channels.
I L LU S T R AT I O N S B Y A L B E R T T E R C E R O
1
Eligible taxpayers can request an Identity
away—especially if you’re expecting a The agency would also never call to Protection PIN at irs.gov/identity-theft-fraud-
refund. It may sound like a small thing, demand immediate payment. It would scams/get-an-identity-protection-pin. | 2“Key
IRS Identity Theft Indicators Continue Dra-
mail you a bill instead. matic Decline in 2017; Security Summit Marks
2017 Progress Against Identity Theft,” irs.gov,
02/08/2018.
LEARN See all the ways Schwab helps n Speak up: If you suspect you’re
MORE keep your data safe at schwab.com/ the victim of identity theft—tax- See page 42 for important information.
schwabsafe. related or otherwise—immediately (0219-8EUP)
8 | C H A R L E S S C H WA B | SPRING 2019Cycle vs. Cycle
Are business and stock market cycles one and the same?
hat’s the difference between Typically, a complete cycle begins 1945, only eight—or less than two-
W a stock market cycle and a with a period of consistent economic thirds—coincided with an economic
business cycle? While often used growth in which measures such as recession,” says Liz Ann Sonders,
interchangeably, the two phenomena employment, inflation and investment Schwab’s chief investment strategist
are related but distinct. spending are rising. Then comes a peak (see “Out of sync,” below).
Stock market cycles are measured by and a slowdown that leads to a reces- That’s because bear markets are
the performance of benchmark indexes sion. Finally, there’s a recovery—and sometimes triggered by noneconomic
such as the S&P 500® and have two the cycle begins anew. (In the United factors like big debt defaults or interna-
phases: a bull market, when a bench- States, when one phase ends and tional currency issues.
mark index is rising, and a bear market, another begins is determined only By the same token, the stock
when a benchmark index has fallen after the fact by the National Bureau market is just one of many factors that
20% or more from its previous high. of Economic Research.) influence the business cycle. “As with
Business cycles—also called eco- Stock market and business cycles most things, you need to consider the
nomic cycles—are natural expansions often move in tandem—but not bigger picture, not just a single metric,”
and contractions of the economy. always. “Of the 13 bear markets since Liz Ann says.
Out of sync
Of the 13 bear markets since WWII, five did not coincide with an economic recession.
Bear market Recession Bear market and recession
05/1946 05/1947
06/1948 11/1948 06/1949 10/1949
08/1956 04/1958
12/1961 06/1962 08/1957–10/1957
02/1966 10/1966
11/1968 12/1969 05/1970 11/1970
01/1973 11/1973 10/1974 03/1975
11/1980 07/1981 08/1982 11/1982
08/1987 12/1987
03/2000 03/2001 09/2001 11/2001
01/2002 07/2002
10/2007 12/2007 11/2008 06/2009
NEXT
STEPS 01/2009–03/2009
Source: Charles Schwab. Data from 01/02/1945 through 01/02/2019.
Want to build a portfolio that can help you weather the Past performance is no guarantee of future results.
market’s ups and downs? Call 888-484-5340 to speak with
a Schwab investment professional. See page 42 for important information. (0219-9RG1)
SPRING 2019 | ON INVESTING | 9Put the real power of Asia in your portfolio. With Asia representing one-third of global GDP and more than half of the world’s annual growth, we believe that investors should consider making a dedicated allocation to the world’s fastest growing region. For over 25 years, we have pursued an active, fundamental approach to investing in Asia, resulting in portfolios with an average active share of 85% and holdings that we believe represent a better exposure to the future growth of the region. Find out more about our experience, insight and passion for Asia—and the role Asia can play in your portfolio—at matthewsasia.com/missing or view the Matthews Asia Funds available with no transaction fee (NTF) through Schwab Mutual Fund OneSource® service at www.schwab.com/matthewsasia. Investors should consider the investment objectives, risks, charges and expense of the Matthews Asia Funds carefully before making an investment decision. This and other information about the Funds is contained at matthewsasia.com. Read the prospectus carefully. Investing involves risk including the possible loss of principal. International and emerging markets may involve additional risks including higher volatility and market illiquidity. Foreside Funds Distributors LLC. Charles Schwab & Co., Inc., Member SIPC, receives remuneration from fund companies and/or their affiliates in the Mutual Fund OneSource® service for recordkeeping, shareholder services and other administrative services. Schwab and Mutual Fund OneSource are trademarks of Charles Schwab & Co., Inc. and used with permission. Trades in no‐load mutual funds available through Mutual Fund OneSource® service (including Schwab Funds) as well as certain other funds, are available without transaction fees when placed through schwab.com or our automated phone channels. For each of these trade orders placed through a broker, a $25 service charge applies. Schwab reserves the right to change the funds we make available without transaction fees and to reinstate fees on any funds. Funds are also subject to management fees and expenses. Matthews Asia and Charles Schwab & Co., Inc. are not affiliated. ©2019 Matthews International Capital Management, LLC
B Y CAR R I E SCHWAB - POM E RANT Z
Q A
Navigating Dear Carrie, Dear Reader,
Student I’m college-bound The headlines are indeed alarming:
and beginning to look
Loans at financing options.
n “The Student Loan Debt Crisis Is
About to Get Worse” (Bloomberg).
Given the sometimes n “Student Loan Debt Statistics in
2018: A $1.5 Trillion Crisis” (Forbes).
alarming headlines about n “The Student Debt Problem Is Worse
When employed thoughtfully student-debt levels, Than We Imagined” (The New York
and managed responsibly, should I be worried about Times).
student loans can pave the
way to a brighter future. overextending myself? However, student debt doesn’t have to
be overwhelming. In fact, when used
responsibly, it can lead to a more secure
future.
That’s because debt often fits into
one of two categories: bad or good.
Borrowing at a high interest rate to
buy a depreciating asset—like using
credit cards to pay for clothing or other
consumer goods—is the kind of bad
debt that can undermine your financial
stability.
Borrowing at a reasonable rate to buy
an asset with the potential to appreci-
ate, on the other hand—like securing a
mortgage to purchase a first home—is
the kind of good debt that can actually
pave the way for a better future.
So which camp does student debt fit
into? Potentially either, depending on
the amount of debt, the terms of the
debt and your ability to pay it back.
Let’s take a look at how you can manage
student debt so it works in your favor.
Consider your future income
The first rule of any financial transac-
I L LU S T R AT I O N B Y A N D R E A U C I N I
tion is to go in with your eyes open.
When you’re contemplating a student
loan, think carefully about your future
earnings prospects.
Although personal circumstances
vary, one useful rule of thumb is to
SPRING 2019 | ON INVESTING | 11A S K CA R R I E
limit your total loan balance to no Maximize federal funding: If you 2 Plan your payments: As soon as
more than the amount you will rea- do have to borrow, use federal loans you graduate, make a list of all of your
sonably earn in your first year on the first. They generally offer lower interest loans and monthly payment amounts,
job. If you’re planning a career in social rates than private loans and often offer then factor them into your post-college
work, for example, this might mean better repayment terms. budget. Most loans have a six-month
borrowing no more than $50,000, grace period before payments begin,
whereas a doctor might justify as much Start at a community college: Some- but if you have a job lined up and are
as $200,000. times referred to as a 2+2 program, able to start sooner, consider doing so.
Better yet, do the math not just this strategy involves attending a Conversely, if your federal-loan pay-
for the first year but for the entire community college for two years, then ment seems unmanageable relative to
life of the loan to better understand transferring to a college or university your income, look into lower-payment
how much you’ll be paying each for another two years, which can help options such as a Revised Pay As You
month—and for how long. There are cut costs considerably. Earn Program, which generally limits
a variety of student loan calculators your payments to 10% of your dis-
available online, including the U.S. Manage your debt wisely cretionary income, or Income-Based
Department of Education’s Repayment Some 65% of 2017 graduates had stu- Repayment, which caps payments
Estimator, which you can find at dent loan debt, owing $28,650 each, based on family size and income.
studentloans.gov/repaymentestimator. on average.1 No matter how big your
student loan burden, however, here 3 Save on taxes: If you make less than
Minimize your loans are four steps you can take to manage $80,000 ($165,000 for married couples),
Besides attending an in-state public or even reduce it. you can deduct up to $2,500 of student
university, which is much less expen- loan interest from your taxable income,
sive, on average, than an out-of-state 1 Automate your payments: If you even if you don’t itemize.
or private university, there are several sign up for automatic loan payments,
other ways to keep a lid on your debt: you may qualify for a reduced interest 4 Tap your employer: If you’re still
rate. Be sure not to miss a payment due looking for a job, consider one of
Graduate in four years: Although to, say, insufficient funds, however, lest the many companies that now offer
obvious, it still bears pointing out that the benefit disappear. student loan repayment assistance.
a five-year plan costs 25% more than a Note, however, that any such assistance
four-year plan. will count as taxable compensation.
Hunt for scholarships: Online There’s an ongoing debate about
resources such as fastweb.com and whether higher education is worth
petersons.com can help you beat the the cost. To me, that’s a closed subject,
bushes, surfacing even obscure sources not only because studies have shown
of funding.
Do the math not just college graduates earn more than
those who don’t get a degree, but also
Look for no-loan schools: If you for the first year but because the value of your education
have a stellar academic record and your for the entire life goes beyond the expenses incurred.
family is of moderate means, consider Whether you pursue a degree in
colleges that offer “no-loan” financial
of the loan to better engineering or literature, you’re broad-
aid packages, which are meant to understand how ening yourself in unquantifiable ways—
significantly reduce or even eliminate much you’ll be paying just don’t break your personal bank to
the need for student loans. These are do it. n
generally offered by the top schools each month—and
in the country, including Harvard and for how long.
Stanford (both of which cover most Carrie Schwab-Pomerantz
costs for families earning less than (@carrieschwab), CFP®, is president of
Charles Schwab Foundation and senior vice
$65,000). It may not be a free ride, but president of Schwab Community Services at
it can constitute substantial savings. Charles Schwab & Co., Inc.
NEXT
STEPS
“Student Debt and the Class of 2017,” ticas.org, 09/19/2018.
1
Learn more about budgeting and financial See page 42 for important information. ◆ Examples provided are for illustrative purposes only
planning at schwab.com/moneywise. and not intended to be reflective of results you can expect to achieve. (0219-8F6K)
12 | C H A R L E S S C H WA B | SPRING 2019CONTENTS THE YEAR AHEAD | STOCK SECTORS
I L LU S T R AT I O N B Y S I M O N E M AS S O N I
2019 Outlook
What to watch for in the year ahead.
SPRING 2019 | ON INVESTING | 13P E R S P E CT I V E S | THE YEAR AHEAD
L
ast year was a rough ride. Interest plans to open 600 new storefronts in consumers and businesses to borrow, Liz Ann Fed Chair Jerome Powell has A tale of two curves
rate uncertainty, slowing growth China this year. which tends to slow economic growth. made it pretty clear that stock market
The yield curve has flattened considerably since the Federal Reserve began raising interest
and trade tensions all weighed on the The spread between three-month volatility alone won’t drive monetary rates in December 2015.
markets, leaving the S&P 500® Index 2 Interest rates and two-year U.S. Treasuries is a partic- policy decisions. Even so, we may need
down 4.38% for the year.1 ularly useful tool for tracking lending. to pare down our assumptions of how December 2015 December 2018
With all three factors still in play, Kathy I’ve got my eyes on the yield When it narrows, that can signal there much higher the Fed will take interest 3.5%
On Investing sat down with Schwab’s curve—that is, the difference between is less credit available for borrowers. rates. The goal is “equilibrium”—that
Chief Investment Strategist Liz Ann short- and long-term interest rates For bond investors, some slowing is is, a neutral environment in which rates 3.0%
Sonders, Chief Global Investment on U.S. Treasury bonds. The curve has good because it tends to keep inflation are neither stimulating nor restricting
Strategist Jeffrey Kleintop and Chief flattened considerably since the Federal down, thereby boosting real yields. But the economy. Some economists are 2.5%
Fixed Income Strategist Kathy Jones in Reserve began raising interest rates it’s a fine line between a slowdown and still predicting two or three more rate
January to find out what they would be in December 2015 (see “A tale of two a recession. In a recession, bonds from hikes in 2019, but we believe that may 2.0%
Yield
watching for in the year ahead. curves,” far right). riskier issuers could underperform safer be overly aggressive given the potential
It’s normal for the curve to flatten bonds like Treasuries. for slower growth, tighter financial 1.5%
1 Trade in such conditions, but as short-term I’ll also be closely monitoring conditions and heightened financial
rates rise relative to longer-term rates, Fed communications. Starting market volatility. 1.0%
Liz Ann I believe the biggest near-term the yield banks earn when they lend this year, the Fed will hold a press
0.5%
issue is trade. The tensions between shrinks. Banks tend to borrow at very conference after every meeting of the Jeffrey Rising interest rates in the
China and the United States are likely short-term rates but lend over the Federal Open Market Committee— United States can have global effects. For
0%
to continue this year, which could intermediate term. If banks’ borrowing the group that sets interest rate example, emerging-market companies
continue to hurt the economy and costs rise relative to what they can earn policy—which should provide addi- operating in underdeveloped local mar- 3 months 2 years 5 years 10 years 20 years 30 years
business optimism, especially if the from lending, they may pull back on tional clues as to how much higher the kets often borrow in U.S. dollars. When
Bond term
two sides can’t reach some sort of deal. lending. That can make it tougher for Fed thinks rates need to go. exchange rates are stable, it has little
Higher tariffs on Chinese imports act impact on these companies’ returns. Source: U.S. Treasury. Data as of 12/31/2015 and 12/31/2018. Past performance is no guarantee of future results.
as a “tax” on U.S. corporations and put But when U.S. interest rates start to
downward pressure on gross domestic rise—which often leads to a stronger
product (GDP) growth. If the Trump dollar—it becomes more expensive the growing risk of defaults. A lot of debt. That could provide a cushion for
administration were to move forward for emerging-market businesses to investment-grade bonds are now rated corporate bonds in a downturn.
with its proposed tariffs on all Chinese pay their dollar-denominated debts. BBB—the bottom tier of Standard &
imports, it could knock a full percentage So, emerging-market performance Poor’s investment-grade scale—because Liz Ann The large amount of cor-
point off our growth rate. And there may remain closely linked to the Fed’s the debt-rating agencies see increased porate debt—especially among
would be ripple effects, too: Inflation actions in 2019. risk of default. high-yield issuers and at the lower-
could accelerate, and capital spending, There’s something else, too: If you At this point, there’s cause for quality end of the investment-grade
profit margins, and business and inves- look back over the past 50 years, concern, but no reason to panic. spectrum—might become a more
tor confidence could all suffer. whenever 10-year Treasury bond yields However, if a significant portion of serious issue because it could lead to a
fell below three-month Treasury bill the BBB-rated bonds are downgraded deeper recession than we might have
Jeffrey One positive for the markets yields, it often coincided with a peak in further, that could cause prices to otherwise experienced. As things stand
last year was the evolution from a international stocks. We’ll be watching fall quickly. (Remember, when bond now, the current economic cycle looks
potential trade war between the United for signs of inversion again because it prices fall, yields rise.) The high-yield more likely to end with a shorter-term,
States and everyone else to a one-front has historically been a very effective market is much smaller than the garden-variety recession than a crisis.
trade battle between the United States signal of trouble ahead for international investment-grade market, so it may be However, if it turns out there’s a bub-
and China. That change made the markets. difficult to find buyers if a rash of down- ble building in corporate debt and it
potential costs to the global economy a grades suddenly floods the market with bursts—the resulting recession could
bit more manageable. 3 Corporate credit fresh supply. Holding on to such a bond be much worse.
I think the financial health of the would mean living with default risk After all, tiny companies nobody’s
Chinese consumer is definitely some- Kathy Corporate credit spreads are (and a potential hit to your portfolio heard of aren’t the only ones struggling
thing to watch, as well. China is a big certainly on my radar. When you see the value as bond prices tumble), while with debt right now. The General
country, and it recently made a major difference between Treasury yields and selling in such conditions could mean Electrics of the world are also having a
transition from an export-dependent corporate bond yields widening, that locking in a significant loss. hard time. I don’t think it’s time to run
I L LU S T R AT I O N B Y S I M O N E M AS S O N I
economy to a consumption-driven means investors are demanding more Corporate debt levels are high rela- for the hills yet, but there’s no question
one. To give a sense of what that means: yield from corporate bonds because tive to the size of the economy, in part we need to keep an eye on this.
Sales during China’s Singles Day holiday they see their risk as rising. That, in turn, because companies have used leverage
were five times what U.S. retailers saw increases businesses’ borrowing costs. for stock buybacks and dividends. That 4 Earnings
on Black Friday in 2018. Meanwhile, Widening spreads are just a natural said, we shouldn’t ignore the other side
Starbucks is talking about shutting part of the economic cycle, but at some of the corporate balance sheet: Liquid Liz Ann Corporate earnings are likely
down some U.S. locations, even as it point you may start to worry about assets have actually risen faster than to slow significantly this year, especially
14 | C H A R L E S S C H WA B | SPRING 2019 SPRING 2019 | ON INVESTING | 15P E R S P E CT I V E S | THE YEAR AHEAD
Mind the gap
The gap between the inflation rate and the unemployment rate has narrowed before every recent recession.
Recessions Inflation rate Unemployment rate
12%
10%
8%
6%
4%
2%
0%
–2%
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Source: Charles Schwab with data from the Department of Labor. Inflation is represented by the Consumer Price Index for All Urban Consumers
(CPI-U). Unemployment is represented by the official U3 unemployment rate. Data from 01/31/1983 through 11/30/2018.
when compared with 2018, which saw is overheating. That was true of many rising initial unemployment claims, it
a big boost from the tax cuts. For exam- of the past recessions in the United could be cause for concern. The stock
ple, corporate earnings grew about 28% States, as well as in Japan and the market has also been weaker recently.
in the third quarter of 2018 and likely U.K. Two recent exceptions were the We’re starting to see more indica-
grew more than 20% for all of 2018. In bursting of the dot-com bubble in 2000 tions that a recession may be in the
contrast, earnings growth estimates for and the financial crisis in 2008, when offing sooner than the consensus view
the first three quarters of 2019 range the economic cycle was cut short by among market watchers. A further
from 6% to 8%. external forces. deterioration in the trade situation
Even those estimates might prove The inflation and unemployment wouldn’t help.
too high given the recent collapse in oil rates have been inching closer for the The good news is that, on the whole,
prices and the effect it’s likely to have better part of a decade (see “Mind the the leading indicators are still rising,
on the energy sector and related indus- gap,” above), so I’ll be paying close albeit at a slower pace than they have
tries. The forecasts also don’t account attention to see whether they continue recently. If the expansion continues
for last year’s strength in the U.S. dollar, their current trend. past July 2019—and I think it will—it
which tends to reduce demand for will be the longest in the post-WWII
American-made goods over time and Liz Ann When it comes to market era. However, the risks of a recession
hurt the earnings of export-oriented data, I’m less interested in absolute lev- are rising. n
companies. els than I am in the general direction
1
Standard & Poor’s, as of 12/31/2018.
or trend. For example, if we continue Percentage reflects total returns, including
5 Leading indicators to see several consecutive months of interest and dividends.
Jeffrey Historically, a narrowing gap
between unemployment and infla- See page 42 for important information. u Past performance is no gurantee of future
results. u Any company mentioned above should not be construed as an endorsement or
tion rates has been a good indicator recommendation. u Forecasts contained herein are for illustrative purposes, may be based upon
of when a country has reached the proprietary research and are developed through analysis of historical public data. u High-yield
peak of the economic cycle. When that bonds and lower-rated securities are subject to greater credit risk, default risk, and liquidity
risk. u Fixed-income securities are subject to increased loss of principal during periods of rising
happens, it may be a sign the economy interest rates. Fixed-income investments are subject to various other risks including changes
in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events,
Subscribe
tax ramifications and other factors. u International investments involve additional risks, which
include differences in financial accounting standards, currency fluctuations, geopolitical risk,
Get regular market updates from Liz Ann, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging
Jeffrey and Kathy at youtube.com/charlesschwab. markets may accentuate these risks. (0219-8J9A)
16 | C H A R L E S S C H WA B | SPRING 2019Retirement When it comes to funding your
income. retirement, you might not know
what choices are right for you.
Schwab can help you develop an
Get smart solutions income-generating portfolio that
makes sense for your current and
and guidance from future goals.
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CC2239031 (0217-R6X5) ADP103983-00 (01/19) 00216924
157481_ADP103983-00.indd 1 10/4/18 12:37 PMP E R S P E CT I V E S | S TO C K S E C TO R S
as a result of the reclassifications—from Introducing:
1.2% to 1.5%—its return on equity rose
Communication Services
from 28.5% to 31.4%.3 Together, these
The brand-new Communication Services sector is made up of all the
Move It
increases suggest the Information
Technology sector may be better posi- companies that were formerly part of the Telecommunication
tioned to weather a market downturn Services sector, plus several big-name companies from Consumer
How the Global Industry than in the past. Discretionary and Information Technology.
Classification Standard’s
new sector—and the stocks Fierce competition Alphabet Inc.–Class A (GOOGL)
being moved into it—may
impact your investments. Many of the big-name technology com- Alphabet Inc.–Class C (GOOG)
By Brad Sorensen panies have long been known for their
AT&T Inc. (T)
stellar growth. Because of that, investors
may assume Communication Services CBS Corp. (CBS)
s the market changes, so too is destined to be a fast mover. That may
A must the systems used to track it. not be the case. CenturyLink Inc. (CTL)
In September 2018, S&P Dow Jones Many companies in the sector are
Comcast Corp. (CMCSA)
and MSCI, creators of the Global locked in a fierce and expensive battle
Industry Classification Standard for consumers’ finite attention. Netflix Discovery Communications Inc.–Class A (DISCA)
(GICS®)—which separates more than alone has committed to spending
29,000 stocks into 11 major market $18.6 billion on content in the coming Discovery Communications Inc.–Class C (DISCK)
sectors—adjusted three of those sectors years, even as AT&T looks to unveil a
to better reflect the breadth, depth and streaming service built around HBO
DISH Network Corp. (DISH)
evolution of the market. as part of its $85.4 billion acquisition Electronic Arts Inc. (EA)
Of all the changes, those to of Time Warner. And both AT&T and
Telecommunication Services—now Verizon are in the midst of launching Facebook Inc. (FB)
known as Communication Services— competing next-generation cellular
may be the most dramatic. Let’s take a wireless services. Netflix Inc. (NFLX)
look at what’s behind the changes and
News Corp.–Class A (NWSA)
what they might mean for investors. Proceed with caution
News Corp.–Class B (NWS)
Sector shuffle While companies in the Communi
cation Services sector should continue TripAdvisor Inc. (TRIP)
Traditional telecommunication services to grow, profits may dwindle as
Twenty-First Century Fox Inc.–Class A (FOXA)
(think fax and landlines) have long competition intensifies and costs
been moving toward obsolescence. At Services sector, from Consumer attractive option for investors looking rise—which is one reason we’ve rated Twenty-First Century Fox Inc.–Class B (FOX)
the same time, the ways in which we Discretionary (see “Introducing: to play defense during a downturn. the sector Underperform. Those
communicate—from email and text to Communication Services,” far right). But with the addition of low- looking to play defense may want to Twitter Inc. (TWTR)
Skype and all manner of social media— With so many large companies dividend-paying tech companies, consider Information Technology or
Verizon Communications Inc. (VZ)
have never been more varied. shifting places, the effects on the sector the new Communication Services one of the other traditionally defensive
This evolution helps explain why composition of the S&P 500® Index sector may no longer be the defensive sectors (Consumer Staples, Health Viacom Inc. (VIAB)
technology-based social media plat- are significant. Before the shuffle, darling its predecessor was. Indeed, the Care and Utilities, for example), while
forms such as Facebook and Twitter— Information Technology represented sector’s dividend yield has fallen from those looking for growth may want to Walt Disney Co. (DIS)
along with Alphabet, the parent of 26.5% of the S&P 500 Index; now it’s 5.4% to just 1.5%1—well below the S&P consider Consumer Discretionary and
search giant Google—were shifted from just 21%. And Telecommunication 500’s yield of 1.9%.2 Industrials.
Formerly part of Consumer Discretionary
the Information Technology sector into Services made up a scant 1.9%, whereas Information Technology, on the That said, growth stocks may strug-
the new Communication Services sec- its successor, Communication Services, other hand, may prove more defensive gle in the later stages of the business Formerly part of Telecommunication Services
tor. Several media companies—includ- accounts for 10%. than it once was. While the sector’s cycle, when defensive positions can
Formerly part of Information Technology
ing Netflix and Walt Disney—also So, what are the consequences for dividend yield increased only slightly make more sense. Investors looking to
I L LU S T R AT I O N B Y G I O R DA N O P O LO N I
decamped for the new Communication investors? add more growth-oriented stocks to
Source: MSCI Inc. Note: This is not a complete list of companies that make up the
their portfolios should be careful not Communication Services sector; see msci.com/gics for more details.
NEXT Defensive disposition to overdo it, lest they leave themselves
Brad Sorensen, CFA®,
STEPS is managing director of overly exposed to a pullback. n
Before the change, Telecommunication market and sector analysis See page 42 for important information. u Any company mentioned above should not be construed as an endorsement
at the Schwab Center for or recommendation. u Performance may be affected by risks associated with non-diversification, including
Log in to schwab.com/sectors to research Services, with its relatively high div-
1
Schwab.com, as of 10/25/2018. | 2Standard &
Financial Research. Poor’s, as of 09/28/2018. | 3Cornerstone Macro investments in specific countries or sectors. Each individual investor should consider these risks carefully before
investments in each of the 11 GICS sectors. idends and stable earnings, was an Research, as of 07/23/2018. investing in a particular security or strategy. u Past performance is no guarantee of future results. (0219-8X8G)
18 | C H A R L E S S C H WA B | SPRING 2019 SPRING 2019 | ON INVESTING | 19Who’s Afraid of a T
he first time the Dow Jones
Industrial Average lost more than
Mark Riepe, head of the Schwab Center
for Financial Research, referring to peo-
impact today. “Although the size of the
market has changed dramatically in
volatility with a grain of salt. “When
the market drops, the best answer LET’S
500-Point Drop? 500 points in a single trading day was ple’s tendency to fixate on a single data the past three decades,” Mark says, “our may often be the simplest: do nothing,” TALK
October 19, 1987—Black Monday. So point—which can be especially risky frame of reference hasn’t.” Mark says. “So long as your portfolio is
perhaps it’s no surprise that 500-point when that data is no longer relevant. Instead, Mark says we should reframe aligned with your time horizon and If you’ve built a solid financial plan and a well-
Lots of folks—but should they be? drops continue to haunt the headlines. Case in point: Black Monday’s 508- the way we think about fluctuations by comfort with risk, you should focus on diversified portfolio, it may be best to ignore the
“It’s a classic case of anchoring bias, point decline would need to be roughly focusing on percentages, not points— your goals, not daily or even monthly noise and focus on your long-term goals. Call us at
at least on the part of the media,” says 10 times that to have the same market and even by that standard to take daily gyrations.” 888-484-5340 to review your investment plan.
30,000
Dow Jones Industrial Average Drop of 500 points or more
From
extraordinary 25,000
to ordinary
The Dow Jones
20,000
Industrial Average
dropped more
than 500 points
just three times in 15,000
the 20th century*
(the first being
October 19, 10,000
1987)—and 29 in
Black Monday
the 21st century.†
5,000
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
1987 1997 1998 2000 2001 2008 2011 2011 2015 2016 2018
Dwindling
impact 10/19 10/27 8/31 4/14 9/17 9/15 9/29 10/7 10/9 10/15 10/22 12/1 8/4 8/8 8/10 8/21 8/24 6/24 2/2 2/5 2/8 3/22 4/6 10/10 10/11 10/24 11/12 11/20 12/4 12/7 12/17 12/24
On a percentage Point 508 554 513 618 685 504 778 508 679 733 514 680 513 635 520 531 588 610 666 1,175 1,033 724 572 832 546 608 602 552 799 559 508 653
basis, recent drop
declines of 500
points or more are
relatively small
compared with
Black Monday.
–2.1%
–2.1%
–2.2%
–2.2%
–2.3%
–2.4%
–2.3%
–2.5%
–2.9%
–2.9%
Even a drop of
–3.1%
–3.1%
–3.1%
–3.4%
–3.6%
–4.1%
–4.3%
–4.4%
–4.6%
–4.6%
–5.1%
1,000-plus points
–5.5%
–5.7%
–5.7%
–6.4%
–7.0%
–7.1%
–7.2%
–7.3%
–7.7%
in February 2018
–7.9%
didn’t measure up.
–22.6%
Percent
change
*Ending 12/31/2000. | †Through 12/31/2018. | Source: Bloomberg L.P. Data from 10/01/1987 through 12/31/2018. See page 42 for important information. ◆ Past performance is no guarantee of future results. ◆ Investing involves risk, including loss of principal. (0219-9PZB)
20 | C H A R L E S S C H WA B | SPRING 2019 SPRING 2019 | ON INVESTING | 21You can also read
