SUMMARY OF TRANSCRIPT BELOW
Well, it's that time of year when all the big banks and financial institutions issue their outlook for the stock market and economy. I recently listened in on Schwab's 2021 Market Outlook and wanted to share some highlights I think investors ought to be aware of. Let's get into it.
Hello once again and welcome to another video from One-Up Financial. I am your host Eric Presogna and in today's video I'm going to share the 4 biggest questions I took away from Charles Schwab's Market Outlook for 2021.
After 20 minutes or so of rehashing market performance in 2020, Schwab's Chief Investment Strategists began taking questions from the field, specifically from advisors on the call.
Here are the 4 questions that stood out to me the most in being reflective of what's on investors' minds, and the responses given by Schwab.
Question 1: What are your thoughts on potential tax increases coming and what does that mean for the market?
Schwab commented that tax changes this year are highly unlikely and may be more of a 2022 scenario than a 2021. And even if something gets announced in 2021, there's a high probability it won't be retroactive, meaning it will still be a 2022 event.
Now this is me speaking...don't think this means you should sit around and do nothing! Even if tax reform is a 2022 event, that means 2021 is going to be an important year from an income tax perspective. Some people may lose certain deductions, see a reduction in the estate tax exemption or have their retirement contributions treated differently in 2022 and beyond. Don't wait, start planning today.
Question 2: How will COVID, stimulus packages, unwinding of debt, effect the economy over the next 3-5 years and how will we fare against other major economies?
What's interesting as I go back through my notes is that the presenters sometimes don't necessarily answer the questions directly, but rather provide more context on certain topics than others. This is one of those times.
Interestingly, Schwab noted China was the only major economy with positive GDP growth for 2020, resulting from how they managed the outbreak and how cautious they were with managing diseases. They've had a true V shaped recovery.
The IMF, or International Monetary Fund which monitors and tracks economic statistics across the globe, is forecasting strong growth for the global economy in 2021 (roughly 5.5% this year, and 4% or so in 2022) which is reassuring.
Schwab sees a continuance of this K-shaped recovery which we've been experiencing in the US where people are benefiting differently based on the ever growing wealth gap. Government debt is now over 100% of GDP which may sound alarming, though Schwab wasn't as concerned about the risk of higher inflation, citing Japan as an example where high debt to GDP doesn't automatically translate to higher inflation.
Schwab expects to see inflation more so in asset prices (ahem, GameStop, Bitcoin, Tesla, Dogecoin) and not as much in the real economy, resulting from stimulus checks going back into the market and financial institutions. We're likely to see more price shocks as opposed to a sustained rise in inflation as we fully open back up.
Question 3: What is your view on international vs domestic stocks, growth vs value?
Again, this is no recommendation or advice to buy or sell securities but rather Schwab's views on specific asset classes.
They have an overall neutral view on global stocks, a somewhat conservative stance. Regarding fixed income, they're slightly overweight international and emerging market bonds, noting the risk associated with EM debt has come down. And with yields where they are in this country, international debt is more attractive.
In looking at the different sectors of the market, Schwab noted healthcare and financials as areas of focus as the economy works its way back to normal. They cited the historical important of consumer spending on our economy and said we may see a shift to a more 'investment-oriented economy" rather than a consumer economy where healthcare companies could benefit as we put more money into healthcare system, research and development, etc. as a result of the aftermath of the coronavirus.
Regarding growth vs value stocks, they really didn't have a strong opinion on one or the other and stated they both play important roles in portfolio construction. It's important to note that composites of value are much different as you look at different indices, i.e. the Russell 1000, Russell 2000, S&P value, etc. Sector breakdowns are different in each, as is market cap. In short, not all growth and value index funds are created equal.
Question 4: What should investors do with cash sitting on the sidelines?
Liz Ann Sonders offered a phenomenal answer to this question by doing what most people hate: answering a question with a question: Who's the investor?
There's no stock answer as investors are so different. I could have a single view of the market but completely different answers for each investor. Can't emphasize diversification enough! And more frequent rebalancing. At least quarterly or more portfolio or volatility driven.
Well that wraps up my summary from Schwab's 2021 Market Outlook. What questions do you have that weren't covered here? Please let us know your thoughts and subscribe to our channel, the blog and follow us on LinkedIn. Thanks for watching as always, and we'll see you in the next one!