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