MARK RIEPE: Welcome to Schwab Market Talk, and thanks for your time today. It is February 4^th, 2025. The information provided here is for general information purposes only, and all expressions of opinion are subject to change without notice in reaction to shifting market conditions. I’m Mark Riepe, and I head up the Schwab Center for Financial Research, and I’ll be your moderator today.

We do these events monthly. We’ll start out by discussing some of the top themes in the minds of our strategists, and we’ll be doing that for about 30 minutes, and then we’ll start taking live questions. If you want to ask a question, you can just type the question into the Q&A box on your screen, and then click submit, and you can do that anytime during today’s event. For continuing education credits, live attendance at today’s webcast qualifies for one hour of CFP and/or CIMA continuing education credit if you watch for a minimum of 50 minutes. That means if you watch the replay, you aren’t eligible for CE credit. To get CFP credit, please enter your CFP ID Number in the window that will be popping up on your screen right now in corner. In case you don’t see it, don’t worry. You should see it again towards the end of the webcast as well. And then Schwab will be submitting your credit to the CFP Board on your behalf. For CIMA credit, you’re going to have to submit that on your own. Approximately 50 minutes after the show started, the directions for how to submit will be found in the CIMA widget that will be appearing at the bottom of your screen. Finally, I want to call your attention to a few resources on the webcast console. In the top-right, you’ll find a link to our 2025 Q1 Investment Outlook for Advisors. To get that make sure you select Advisor as your role when accessing the content. In the bottom right-hand corner, you’ll see a link to our latest market comp, a new chart on bond returns, and a link to register for our advisor trading webcast.

So let’s get to our speakers. They are Jeffrey Kleintop, our Chief Global Investment Strategist; Liz Ann Sonders, our Chief Investment Strategist; and Kathy Jones, our Chief Fixed Income Strategist.

Jeff, we’re going to start with you. We’ve got some kind of clarity on tariffs this weekend, and then a lot of events going on yesterday. Maybe let’s start out just give a quick summary as to what happened.

JEFF KLEINTOP: Sure. Yeah, there’s a great quote from the Princess bride where Indigo says to Wesley, ‘Let me explain. No, there’s too much. I must sum up.’ So here’s my summary of everything that’s happened over the last few days.

So since Trump entered office, he’s announced 25% tariffs on Columbia and then took them off before they began. And of course the same thing now with 25% tariffs on Mexico and Canada. In all three cases, the tariffs weren’t about economic policy. They were about gaining concessions on immigration and border issues. The number one surprise in our top five surprises for 2025 publication was that big tariffs could come fast after Trump was in office, but then go away just as quickly, which supported our positive outlook for the markets this year. We’ll have to see if that continues to be the case.

Now, the 10% increase in China tariffs did go into effect. I think everyone expected that. Today’s relatively small and focused China retaliation with tariffs on imports from the US hitting less than 5 billion of US energy imports to China that are set to start in about a week seems measured and intended for further negotiation and avoiding escalation. In fact, the two presidents are looking to have a phone call this week. It’s been fairly easy, Mark, to get around the China tariffs by exporting through Cambodia or Vietnam or Thailand, for example, to get to the US since the Trump 1.0 tariffs went into effect. But there could be more to come on the tariff front. Those tariffs were delayed, not canceled, so we’ll have to see what happens in early March.

There could be more to come on Europe. Trump has threatened Europe with tariffs too, but with no specifics. I think the most valuable lesson that Europe’s policymakers have learned in the past 24 hours is that the White House is open to negotiation on tariffs, and that’s a positive factor for averting a trade shock and boosting that region’s growth outlook. The only question is whether there’s a unified political will in Europe to drive those negotiations. Germany, of course, Europe’s biggest economy and major auto exporter to the US, is looking for a new leader and we won’t know who that is until later this month. And it may be that the White House is awaiting the outcome of the German election to move forward to seek negotiations. Notice how Trump refused to specify a timeline when he might announce tariffs against the EU. And that, Mark, to me, points to a desire to negotiate.

MARK: So Jeff, thinking from the standpoint of, let’s say, an international investor, what do you see the biggest impact, at least at this stage, given we’ve got these 30 days on Canada and Mexico, how is this going to affect their markets, their economy?

JEFF: Well, it certainly raises the level of uncertainty, and that’s a problem for these economies. The dependence on exports to the US for both Canada and Mexico. I mean, 71% of Canadian exports go to the US, so it certainly means a likelihood of recession should those tariffs actually hit. In fact, with Mexico’s GDP negative in Q4, that country may already be in a recession if these tariffs go through towards the end of Q1. Further rate cuts are likely in Canada, but complicated by maybe pressure on the currency from any tariffs. So turning things around could be difficult.

The stock market impact of tariffs on those countries may be less, though, than the economic impact, and I say that because, for example, a lot of Mexican businesses that have large US sales come from their operations in the US, and therefore, aren’t subject to tariffs. In fact, four of the top five Mexican stocks that make up more than 50% of the Mexico index wouldn’t even be directly affected by the tariffs. One is a bank, one is a Coca-Cola distributor down there, a telecom provider, and Mexico’s Walmart. In fact, it’s just the mining company, Grupo Mexico, that’s directly affected. So that can help account for why the Mexican stock market is up 6.8% so far this year, measured in dollars, while the S&P 500 is up only 2.5%, Mark. So a bit of a difference between the economic impact and maybe the stock market impact.

MARK: Jeff, one of the registration questions was about China, and it kind of listed a long list of ills that are facing China right now, and then this trade war adding to that. So the question is, at this point, what impact is this going to have on global investing in general? And if China is really weakened economically, is this going to be a threat to Xi Jinping’s rule?

JEFF: I don’t think so. Slow growth isn’t new in China. This is year four. ‘2022’s extended COVID lockdowns, then 2023’s property developer failures, and last year’s consumer spending slump have all weighed on China’s growth. The flip side of China’s weakness is that consumers have spending power if they feel more confident to unleash it when it comes to the housing market where much of their wealth is stored. And inflation is currently near zero, so they have some flexibility on policy. Only about 3% of China’s GDP is tied to direct exports to the US, and those are unlikely to go to zero even under this higher 10% tariff regime. So the trade issue isn’t a big new one for China. It’s really all about domestic consumer spending, and the government could choose to unleash stimulus to support consumers and housing if they feel it’s needed in response to further tariffs to keep GDP from slipping below 5%.

Finally, China’s got one party. There’s no opposition party that could take advantage of the domestic economic softness and lead to a political change. China’s stock market measured by the Hang Seng Index produced a total return of 24% last year, nearly matching the S&P 500. I think the S&P was up 25. The reason is that Chinese stocks are priced for a very weak economy and turbulent political climate. Any sign of a turnaround, which we saw hints of last year, could see China’s stocks bounce. So it’s not as easy as writing China off because of its domestic economic weakness and now these trade issues. China has the fuel to turn things around should they choose to do so.

MARK: So last question for you, Jeff. You know, given everything you just went through, what’s the overall outlook then for international investing?

JEFF: Well, we’ve got to think about currency first, and the dollar is flat this year. While tariffs, if implemented, should push up the dollar, we’ll see what we get. For example, the peso fell and then climbed right back to where it was before the tariffs were announced last week. Last year’s dollar strength really weighed on unhedged international stock market exposure, but this year we’ll have to see. In dollars, both Mexico and Canada stock markets are outperforming the S&P 500 this year despite everything going on.

To me, I guess I might look at the EAFE Index. So that’s generally what we look at when we talk about developed international stocks. And that might offer a relative safe haven from the trade voice since it does not contain any of these first-round combatants in the Trump 2.0 trade war. EAFE doesn’t have Mexico, doesn’t have Canada, it doesn’t have China, doesn’t have the US, and it was already outperforming this year. It’s now 4.7% versus the S&P 500’s 2.5% year-to-date return.

MARK: Thanks, Jeff. Liz Ann, let’s bring you into the conversation. So what’s your take on the tariff situation from the perspective of the US investor? Obviously, a huge reaction yesterday in the morning. A lot of that was reversed, all of it was reversed in the afternoon. Where do we stand?

LIZ ANN SONDERS: Yeah, I mean it is one of those questions where you’re asking to me 10 minutes into this, Mark, and that the answer might change 50 minutes into this. So that is the nature of this beast, is the volatility associated with tariffs, the announcements, the give and take in terms of retaliations, delays. And I think that as a volatility driver is likely to persist. That is one of the pages you can pull from the 2018 playbook. It’s just the manner by which a lot of this gets announced as at least a short-term volatility driver.

And I also think, and we saw it a bit, if you just look at action within the market yesterday, action within the market today, how swiftly you can see changes in terms of where leadership resides. The early part of yesterday was clearly a risk off kind of day. The defensive-type segments of the market, like consumer staples and healthcare and utilities did well, and the typical growth stocks technology at the bottom. Now you’ve got what we call the growth trio of tech, communication services, and consumer discretionary, along with energy at the top, and you’ve got the defensives down below. So a lot of these really short-term knee jerk reactions. We can all do the math. There’s been great work done recently by the Federal Reserve. Peterson Institute has done great work on, collectively, what this could mean to the US economy in terms of GDP, to overall inflation. The problem is the moving target nature of this. So Kevin Gordon and I wrote a report yesterday that goes into a lot more detail on this.

The other thing that I find interesting, and especially now as we have a little more meat on the bones, at least as it relates to tariffs on Chinese imports, but also the retaliation announced, which in the aggregate is not large, but it allows you to start to think about the fact that there’s actually an implication for exporters in the United States, not just importers. We know that it’s the importers that actually pay the tariff, and therefore, they garner a lot of attention, and a lot of the math associated with what is hit. But the reality is that even though the import side of the US economy is… I think it’s 15.7% as of the fourth quarter of last year, it’s about 11% for exporters. Now, it’s a much lower, it’s closer down to 3% if you just look at the impact on the US economy from exports to the combination of Canada, Mexico, and China. But there seems to be much less focus on the impact on exporters of a trade war, of retaliation. So I wouldn’t be surprised if that started to capture a little bit more attention.

But as a day-to-day driver and a continuation of what we posited in our 2025 outlook that we were likely to continue to see a lot of these rapid fire rotations at the sector level, you certainly can add tariffs into the mix as to what might be a driver of some of those sector rotations, and even one level down from that, industry rotations.

MARK: Liz Ann, do you see that tariff wild card, let’s call it, kind of cutting into some of the enthusiasm for the Mag 7 stocks, or was the enthusiasm for those stocks, was that already waning a little bit?

LIZ ANN: Well, I think there, obviously, was a bit of waning in enthusiasm, and it kind of came to a bit of a crescendo a week or so ago when we got the Deepseek news that caused Nvidia to have the single largest one-day market cap loss in stock market history. You know, tech is the worst-performing sector on a year-to-date basis. And tech doesn’t incorporate all seven of the Magnificent 7. The seven stocks actually reside in technology, communication services, and consumer discretionary, but tech is often considered the poster child for not just the Mag 7, but sort of the AI trade. And with volatility, obviously, the tech sector within the S&P has not gone anywhere since last June. Again, ups and downs, but we’re about where we were now last June. Deepseek had that initial impact, and I think has contributed to some of the weakness in some of those stocks. If you look at the seven stocks, you do still have one in the top 10 best performers year-to-date, and that’s Meta, but four of the stocks are in the bottom quintile of performance, with Nvidia, obviously one of the market darlings, in the place number 494 out of 500 stocks this year.

We can also look at the Magnificent 7, and look at their revenue exposure to as of now the three countries that are wrapped into the tariffs right now, the tariff negotiations, notwithstanding the delay with Mexico and Canada. There’s really very little exposure among the Magnificent 7 to Mexico. It’s de minimis. It doesn’t show up on a bar chart. You have a little bit of exposure, I think… yeah, to Meta. I think it’s… I’m looking at some data in front of me… 2- to 3% revenue exposure to Canada, but when you get to China, that’s where the numbers get larger. And in the case of Tesla, you have about 21- or 22% revenue exposure to China. You’ve got Nvidia and Apple are similar, in the 16-, 17% range. And then you get down to Alphabet and Amazon, and you’re talking only about single-digit kind of percentage in terms of revenue to China. But the impact is there, and I think that’s been a contributing factor behind at least more sporadic performance among that group of stocks.

MARK: Last question for you, Liz Ann, and then we’ll switch to Kathy. You know, we’re, I don’t know, about maybe 50% of the way in terms of companies reporting 2024 Q4 earnings. What are you seeing so far?

LIZ ANN: Yeah, so there’s something called the blended growth rate, which throughout earning season changes on a day-to-day basis because it encompasses the companies that have already reported their actual numbers, combined with consensus estimates for those companies that have yet to report. So every day as new numbers come in, you get more of an update to the blended. The blended becomes a higher percentage of actual and a lower percentage of consensus. Right now, the blended growth rate is about 12%. At the start of earning season, before we got earnings report number one, that expectation was that we would have about 9-1/2% growth, so that is definitely an upward trajectory. However, there’s been a bias in terms of that growth rate going up, with a smaller number of stocks or companies that have reported, because the beat rate is down to only about 75%, and that has been trending down. It started with a bang, at well over 80%, and that’s because so many of the financials outperformed expectations, but that’s been trending down.

What’s also interesting is in a normal environment without some of these uncertainties, not least being tariff-related uncertainties, you would expect at least some upward movement to the forward estimates when you get an outperformance to the tune of 2-1/2 percentage points relative to what was expected at the beginning of the quarter. But for 2025 estimates, all four quarters those estimates have come down a little bit, and collectively for the calendar year, we’re now looking at 12.9% expected growth, down from 14% at the start.

So there is still a lot of skittishness as it relates to the outlook for 2025, notwithstanding the strong reports so far, other than the beat rate for fourth quarter of 2024.

MARK: Great, thank you. Thank you, Liz Ann. Kathy, let’s bring you in. Fed had a meeting last week. What did we learn from them then? Maybe that’s the first part of the question. And the second part of the question, how does tariffs, how is that going to affect their thinking, if at all?

KATHY JONES: So as everybody knows, the Fed held policy steady at the last meeting, and the statement was perhaps a little bit hawkish, a couple of the wording changes, took out some of the longer sort of bias towards easing. But then in the press conference, Fed Chair Powell indicated he was still biased towards easing, and that they do expect the path of inflation to continue to come down. He pointed out that the three-month moving average of the Core PCE Index, actually the overall PCE Index, has slowed down substantially from the rate a few months ago. So it was clear that the bias is still towards easing, but the Fed doesn’t have the data it needs to cut rates.

Now, what does that mean in the context of tariffs? Well, tariffs are twofold impact. Initially, prices go up, and that’s usually because you have… the importer passes along the price increase that they’re paying for the tariff to consumers. And so you get price level increase, at least a one-time increase, if not ongoing, depending on how tight supplies become. So that’s an inflation hit that the Fed can’t really do much about. They have previously looked through that. In 2018, 2019, they decided to look through that and say, ‘Okay, well, we know that that one-time hit is there. It’s not all of great magnitude. You have offset because the currency goes up. So whenever… and you get these tariffs, usually the currency in this case, the dollar goes up, which it has done already. It’s approaching its 2022 highs.’ So they could look through it back then, but the tariffs were much smaller and more limited in 2018 and 2019. Now they have a much bigger percentage tariff, much bigger potential impact on the economy. So on a price basis, they probably can’t do much easing until you get the second order impact from the tariffs, and that would be slower growth.

So initially, they might decide to look through and continue to cut rates if inflation were coming down or expected to come down, but now the Fed will have to hold steady because they’re bigger tariffs, the economy is much more sensitive to inflation than it was back in 2018 and 2019, and so that ties their hands in terms of trying to cut rates. And then, though, you go down the road, and tariffs typically mean slower economic growth, and hits different industries in different ways. Then the Fed can focus on that in the long run.

So long story short, they just sit on their hands, they wait to see what actually develops, they watch the data, and the data right now are saying inflation is stalled around 2-1/2- to 3%. That’s not where they want it to be. And the economy is running at a pretty healthy rate, you know, 5% nominal GDP growth, 2-1/2-plus in real terms. Unemployment rate is still low, hugging 4%. Right now, there’s not an impetus to make a change until they get more clarity, until they have more information to see what the impact of tariffs will be. They will probably just sit on their hands.

So we don’t have them doing anything in terms of changing policy in the first half of the year, and then possibly cutting one or two times depending on how the data play out.

MARK: Thank you, Kathy. What are your thoughts on the 10-year? Where do you see that going this year?

KATHY: Yeah, so right now it’s kind of stuck around 4-1/2- to 4.6%, somewhere in there. It’s been there for quite some time. I think that that actually reflects a reasonable value, a fair value, if you expect as the last dot-plot showed, and as the market expectations show, that the Fed will cut two more times and get the Fed Funds Rate under 4%. If however, we don’t get a rate cut this year, then I see upside risk that would probably be due to inflation getting more of a boost, or growth outperforming, or perhaps wages rising because of immigration policy and a shortage of labor. Then I think the risk is so the upside in the 10-year around 5- to 5-1/4%. So sitting sort of at fair value right here, but probably more risk to the upside than the downside, depending on how these policies play out.

MARK: So Kathy, last question for you, and then we’ll start taking live questions. I saw some big movements in the dollar as a result of some of the tariff discussions. What’s your outlook right now?

KATHY: Yeah, it’s pretty typical for the currency of the country imposing the tariffs to see its currency rise to try to offset the expected price change. And actually over the past year or so, we’ve seen the dollar go up about 10- to 12% against some of the countries which are expected to be recipients of those tariffs, like the Chinese yuan. So as long we have tariffs in play, as long as the US economy is doing better, as long as the Fed is on hold while other central banks cut rates, the dollar is likely to stay strong, has more potential to go higher than lower in that scenario. If we get tariffs resolved, if we get the Fed back into easing mode, then there’s room for the dollar perhaps to come down a bit in the second half of the year, but for right now, more likely to hold here or go up from here, given those factors of tariffs, interest rate differentials, which are very much in favor of the US dollar, and growth differentials, which are still very much in favor of the US.

MARK: Thanks, Kathy. Let’s take some live questions here.

Liz Ann, let’s go to you first. ‘The US stock market is very richly valued relative to its history. Do you worry less about this than you might have in the past given the high-quality nature of the companies driving the high valuation?’

LIZ ANN: Well, yes and no. And I think it is important to look at valuation over an extended period of time for multiple reasons. One, the macro backdrop matters. Trends up and down in inflation tends to bring on either higher than average valuation levels or lower than average valuation levels. But probably the most important connectivity to valuations that have moved up over time is the structure of the US economy, and how much more innovation technologically-driven we are. That generally affords a higher multiple, and that can be probably the primary explanation for why multiples have moved higher.

It’s a back pocket worry when the market gets richly valued, but that doesn’t tell you anything about near-term market performance. I think valuation is part of anybody’s tool if they’re trying to assess whether the market is going to have above average or below average return, say, out a one-decade period of time. You know, Mark, we’ve done scattergrams on this, and if you use a starting PE ratio either on trailing or forward basis and look at subsequent 10-year returns, there is a correlation. The higher the starting valuation point, the lower the returns, and vice versa. If you do a one-year outlook period, there is almost no correlation. So it doesn’t represent anything resembling a market timing tool, and that’s in part because it’s tied to sentiment, it’s kind of an indicator of sentiment. And you have had many periods in the past, you know, mid- to late-1990s is a perfect example of an environment where the market was really expensive even in the ‘95, ‘96 period of time, and it got more expensive and more absurdly expensive. And then you added in the incredibly frothy sentiment, and ultimately, you hit a breaking point in the early part of 2000, but you had an extended run when you could have said those things. So I do worry about it, but it’s more of a back pocket concern.

Now, if inflation were really to accelerate here, all else equal, that could put some downward pressure on valuations, and absent an improvement in the denominator in the equation, that could be considered a risk factor for the market, though it’s not our base case.

MARK: Thanks, Liz Ann.

MARK: Jeff, this one’s for you. ‘My best stocks are a couple of European companies. Why is the rest of Europe so dull?’

JEFF: Well, I guess it depends on your perspective. Let me put it this way. So you may have just noticed a couple of stocks in Europe doing particularly well. Europe’s market is much more diversified than in the US. You don’t see the same type of performance concentration or even stock market concentration you see in the US.

Looking at… so there’s 11 GIC sectors. Ten of the 11 are outperforming in Europe. So that version of that sector in Europe, financials in Europe outperforming financials in the US. The only exception is communication services, for obvious reasons, right? That’s where the big sort of Mag 7-type names are.

But other than that, Europe has been outperforming in every sector. So it is pretty broad. It may be not as spectacular as how US performance, concentrated in one or two stocks. It’s much broader and maybe more incremental, but it is a fairly wide base of support.

And I’d note if you go back to the beginning of this bull market, back in October of 2022, if you take Nvidia, the big star out of the S&P 500, European stocks have outperformed the S&P 500, and by a decent little margin there. So the EMU index, the European Monetary Union Index, has outperformed the S&P 500 if you subtract Nvidia. So we pay a lot of attention to these big stars, but you don’t have those same kind of stars in Europe. You have much broader outperformance, again, across most sectors.

MARK: Thanks, Jeff.

Liz Ann, let’s send this one to you. Shortest question, we’ve got. ‘Best factors?’

LIZ ANN: So yeah, as a reminder for new people on these calls, we have been emphasizing factors quite a bit over the last couple of years, meaning just investing based on characteristics. And we think that at least as an overlay to those sector-based decisions, outperform, underperform, and we do have ratings on all 11 sectors, we think taking that factor approach is beneficial, in part because there’s been more performance consistency at the factor level than there has been at the sector level.

So some sort of how our factor focus has morphed over the past year or so. We’ve had a strong emphasis on quality-oriented factors, so balance sheet-related factors, strong free cash flow, fairly low debt, high interest coverage. We’ve also had a focus on quality-related growth factors like positive earnings revisions.

I think in light of… and it was part of the question that you asked earlier, Mark, in light of some of the valuation considerations, one of the ways we’ve talked about our factor focus more recently is almost to use sort of an old world terminology, a GARP-type approach, growth at a reasonable price, so bringing in a little bit of that valuation emphasis. And then in light of what’s happening with tariffs, uncertainty related to that, I think another factor probably worth putting into the mix would be a low volatility factor, not to mention trying to figure out where exposure is highest or lowest in terms of individual countries that are being targeted. That of course is a moving target on a day-to-day basis, but to get at it more broadly, that low volatility factor probably should be put in the mix as well.

MARK: Thank you, Liz Ann.

Let’s see, Kathy, let’s go with this one. ‘With the current constraint of the debt ceiling, the government can put money into the system when it pays its debt, but cannot take money out of the system by selling more bonds. Won’t this contribute to inflation?’

KATHY: So the Treasury is still issuing bonds, and they haven’t hit sort of that drop dead date for the debt ceiling yet, and there was plenty of maneuvering room. I think the current estimate is still a little fuzzy, but there’s still room to maneuver for a couple more months, if not into the summer, depending on various factors, the tax receipts and things like that. So still getting money in, and tomorrow the Treasury will auction some bonds. So things are still functioning right now. It’s not too much of a constraint. It will get to be more of a constraint the closer we get to the midsummer months.

So we’re hoping, as always, that Congress can come up with some sort of an agreement to pass the debt ceiling, and get beyond all this maneuvering, but for right now, the impact on the economy, inflation, etc., should not be all that significant until we get closer. And then of course, they’re constrained in many ways. Then the Treasury would have to stop making payments, although there’s some talk that they’re stopping that now. I’m not really sure what’s going on at Treasury, to be honest, but the usual pattern is what they do, they might pay government workers but not fund their pensions, and defer some payments. So things like that. Defer some payments to contractors, etc. That’s usually how it’s done. I would expect that’s pretty much the playbook again, unless Congress can get together. But according to Mike Townsend, who does our Washington research, we still have a couple of months until that constraint is hit.

MARK: Hey, Kathy, just a follow up on that point. Given this kind of uncertainty around Treasury, the question here is, ‘How is the rest of the world viewing the safety of our debt?’

KATHY: Well, you know, my typical response is it is not a problem, that the dollar and US Treasury still serve as a safe haven. And we saw that when the stock market went down, bond market held up pretty well, and we saw some safe haven flows.

I will say, given the amount of uncertainty right now, tariffs creating trade conflicts, it may be contributing to some uncertainty about the stability of the US dollar and treasury market. I don’t think this is a long-term issue, but probably… I’m probably more concerned right now than I have been throughout my career about that. I would still stand by the idea that the world is still buying treasuries, and still sees it as the financial asset, the risk-free asset. But given the volatility, given everything that’s going on, you may see some alignment shift, and see investors start to hedge their bets by diversifying more into other markets.

MARK: Thanks, Kathy.

Jeff, this one is for you. ‘Do you think that even though the tariffs are being used as a negotiating tool that they may have of a long-lasting economic impact. For example, Canadians continuing to boycott American goods because of this retaliation, in general disgust with the current administration?’

JEFF: That’s entirely possible, yes. And I think in the near-term, a tariff delay seems like the worst of both worlds. You still get companies preemptively raising prices and lifting inflation while holding back on investment, given the uncertainty, and you don’t get any tariff revenue, all the negatives, not even one tiny positive. So yes, there are even ramifications from delayed tariffs that are likely to take shape here over the next month, whether they go into place or not. So certainly there… I mean, taking some of our closest allies and, you know, pushing back against them in a pretty rough way I think can have some ramifications, and we’ll see how this shapes up. It’s certainly the potential for boycotts, as was mentioned, in addition to, you know, really reconsidering supply chains, and a lot of other things going forward. So we’ll have to see what the long-term effect is.

MARK: Thanks, Jeff.

Liz Ann, we’ve got a couple of questions here about… essentially along the lines of if we get a meaningful reduction in government spending, what impact might that have on increasing the odds of recession?

LIZ ANN: Well, government spending is not a huge share of the economy. The kind of significant drop that at least was discussed pre-inauguration by Musk and team of a $2 trillion cut in spending, even Musk himself has had to backtrack on that. It just wasn’t really mathematically feasible. We’re I think at about 20,000 federal workers have accepted the buyout. Maybe that’s not the right word to use, but that’s the word I’m using for lack of a better word right now, retirement buyout, but that’s still an ongoing process. They’re limited to where they can cut elsewhere, particularly given that they’ve said they’re not going to go after a lot of the non-discretionary spending, defense and entitlements. So I think they’ll be able to chip away at it. But all else equal, it’s probably not enough to move the economy into recession.

I think the real recession trigger in this particular backdrop might feed from any meaningful weakness in corporate earnings, which would probably feed to a more meaningful layoff cycle than what we’ve seen so far, and then obviously impact the employment side of the economy. I think that has been the most important pillar of support for the US economy, for the consumption side of GDP, which is 68% of GDP. I think if you see employment falter, it would have to be broad, not just specific to the government sector, that to me, would be the tentacle into a classic, you know, NBER-declared recession.

MARK: Thanks, Liz Ann.

Kathy, this one is for you. ‘Will the Fed begin QE soon for liquidity purposes?’

KATHY: No, I think the first step is they will end QT, quantitative tightening, probably by mid-year. The balance sheet has come down pretty significantly, several trillion dollars. It’s now under 25% of GDP. In total, it’s around 23%. So that’s within the target range that some of the various Fed officials like Waller talked about, a 20- to 25% range for an optimal size of the balance sheet relative to the size of the economy. I think they will end QT probably mid-year, so that they make sure that there are still ample reserves in the system. So the real focus is on how much reserves we have in the financial system. They want to keep it ample, but not abundant. I think that that means we’re talking somewhere in the 11-, 12-, 13% of GDP level. There should still the middle of the year after QT ends be ample reserves in the system. So there shouldn’t be any need to engage in QE. That’s more for when the economy really falls apart, you know, the house is on fire, and they need to do something aggressive. So right now I think it’s more a matter of end QT, make sure the reserve system is functioning properly, and go from there.

MARK: Thanks Kathy.

Jeff, ‘What is your outlook for Japanese equities?’ And then more… that’s one question. Then more broadly, ‘What countries or areas do you see having the best chance of growth?’

JEFF: Japan has not been addressed by the Trump administration, nor has the UK. So those two seem to be outliers from the current trade war. They may ultimately be impacted, but so far, they’re not. Japan does seem to be improving in earnings growth. The manufacturing recovery that we’ve started to see should benefit Japan, should be one of the better performers this year. But a lot is dependent upon how this trade war shakes out, in the sense that trade and manufacturing is critical to Japan’s economy. They make a lot of cars, make a lot of TVs and other things that are sold around the world. So that environment would be very important. The IMF had forecast a real improvement for growth in Japan this year, and were that to happen, you would expect to see earnings growth move right along with that and solid performance by Japan, an area we’ve liked for a while.

As I look around the world, I guess one of the areas that stands out at the moment might be India. India cut tariffs this week, and the reason they did that is to boost domestic manufacturing. The cost of supplies if you’re forced to buy them within the country is higher. So essentially, lowering the cost of inputs should be a boost here to India’s economy. A number of other factors, stimulus factors coming into place for India. India’s economic growth slowed to 6.4%, which is actually slow for India. Things seem to be turning around there, and they seem to be avoiding many of the trade war tariff issues. India has the ability to lower tariffs here and not raise them in the face of a trade war. That could be sort of a secret weapon for them. So that’s an area within emerging markets that look pretty good. I still favor Europe over Japan, but Japan does have a few things going for it here if we can see this fledgling manufacturing recovery really gain some legs here in 2025.

MARK: Thanks, Jeff.

Liz Ann, ‘Will US value stocks outperform US growth stocks this year?’

LIZ ANN: So I love this question because I get to explain why I don’t think it can be asked in such a broad, generic way. I have lots of mantras around this. I think growth and value almost has three ways you can think about it. There are the actual characteristics of growth and value. Does a stock screen well on value characteristics? Does it screen well on growth characteristics? Then there’s our preconceived notions of what are growth stocks and what are value stocks? And then there are the actual indexes labeled as such, and that’s where I think investors can get into trouble because you’ve got… the two most popular index providers of growth and value, of course, are Russell and S&P . They do it a little bit differently. Russell has their Large Growth and Large Value, and Small Growth and Small Value, via 1000 and 2000, respectively. S&P does it a bit differently. They’ve got S&P Growth and S&P Value, and there can be stocks that sit in both the Growth and Value indexes. Then they have S&P Pure Growth and S&P Pure Value. If you’re in Pure Growth, you don’t exist in a value index and vice versa with value.

A perfect example of how this can sort of trip up investors is just… and it’s only year-to-date, but it’s just an example. Year-to-date, the best performer among all of those eight growth and value indexes is actually Russell 1000 Value. But the best among the S&P indexes is actually S&P Pure Growth. And the worst… I mentioned that Russell 1000 Value is the best performer year-to-date. Well guess what the worst performing year-to-date is? It’s Russell 2000 Value.

So to just say value is going to do well, are you talking about pure value-type indexes? Are you talking about the characteristic of value? Are you talking about large-cap value? We tend to think about growth and value in factor terms, not in index terms.

The other thing that comes into play in the construction of different indexes is what the sector representation is. If you’re dominated by financials like many of the smaller-cap value indexes are and financials are doing well, that’s going to boost. Or if you have a deficiency in something like communication services when that’s ripping.

So if you’re taking an index approach, make sure you understand the methodology, the construction, and the constituents within the indexes.

MARK: Thank you, Liz Ann.

And Kathy, this question was submitted when this individual registered for the webcast, so thank you for sending that in. ‘Can you comment on the outlook for municipal bonds over the next six months?’

KATHY: Yeah, the outlook is good, in the sense that the yields are relatively attractive. I think relative to corporates, it might not be on an after-tax basis, yields might not be quite as high, but in general, after-tax basis for people in the highest tax brackets in the high tax states, the yields are northwards of 6… tax-adjusted yields are northward of 6-, 7%. So that is very attractive, given the underlying credit quality in the municipal bond market.

And we still see the credit quality generally staying pretty high in the municipal bond market. Most state and local governments have plenty of reserves, money in rainy day funds. It’s not been used up. It’s still there, and can cover their expenses for a number of years to come. Even California, which everyone has fretted about, has ample reserves. And then valuations are decent. Again, maybe not as attractive as corporates, but it’s a different risk profile. And yields are attractive for building portfolios. The long-term prospects still look pretty good. There has been some chatter about tax policy shifting to eliminate the tax exemption of municipal bonds.

But this happens… just about every time we go into a tax policy conversation, this comes up, and it always gets swatted back because it would just raise the cost of borrowing for state and local governments. So it’s not a policy that ever has been implemented, and we doubt that that will happen again this time. But it might hit the airwaves here over the next couple of months as we get closer to some sort of budget discussions.

But overall outlook’s pretty good. Just like anything else, there’s a risk that yields will rise from here, but we continue to like using munis in portfolios, particularly for investors in higher tax states.

MARK: Thanks, Kathy.

This one I’ll throw to the group, and the question is, ‘What do you see as the biggest risk to the markets?’ So Liz Ann, I’ll have you start first, then we’ll go to Jeff, and then we’ll go to Kathy.

LIZ ANN: I think it would probably be a combination of forces. I already touched on the fact that we’ve got rich valuations. At least in pockets of the market, you’ve got some frothiness and sentiment, although I think some of that gets eased by virtue of the volatility that we’re dealing with on a day-to-day basis now. So that could represent a risk backdrop. The tariffs that actually get implemented, and we actually move into a full-blown trade war. That doesn’t seem to be the base case right now, given at least the delays relative to Canada and Mexico. But I think a full-blown trade war would be a significant risk. And then either related to tariffs or unrelated, any significant move up in inflation from here, if that shifts the trajectory for the Fed from what is now clearly a sort of a pause bias to a tightening bias, again, I think that would be difficult for the equity market to digest.

MARK: Thanks, Liz Ann. Jeff, you’re up.

JEFF: Yeah, I mean I just reiterate the exact same things Liz Ann said. And I mean, considering the fact that the market has begun to come around to the idea that, you know, in some parts of the world maybe the rate cut cycle is over, they’re certainly not of that opinion outside the US. And if in fact inflation started to pick up as a result of some of these trade barriers, that would be a concern. Many of those markets are really depending upon continued easing in monetary policy in order to get those economies turned around. Europe is not really in full recovery mode yet. They are beginning to recover, but they’re still lingering recessions. Germany has experienced a negative quarter of GDP every other quarter for eight quarters now. It’s just simply stalled out, and we need to see this follow through… early signs of a recovery there, but we need to see that.

There’s still more political turmoil to come. Remember, we’ve got an election coming up in Canada. We’ve got elections coming up in Europe. Lots of things on the horizon to keep an eye on.

All of this tied back to the trade issue and international relations. Trade is a very big issue for companies. Most of the big companies that make up the indices have an enormous amount of foreign sales and foreign sources in terms of suppliers. So obviously, this is the thing we want to keep an eye on.

MARK: Thanks, Jeff. Kathy, what’s on your mind?

KATHY: Yeah, I don’t have a lot to add to that. Obviously, trade wars would be a first order risk.

For the bond market, I would just add any policy moves that still creates so much uncertainty that it weakens confidence in the Central Bank or the Central Bank’s ability to do, to maneuver around shocks would be a worry to me. So again, this is something that when people say, ‘Well, what keeps you awake at night?’ I say, ‘Well, undermining the independence of the central banks would certainly be an issue that I think could have really negative impacts throughout the financial markets.’

MARK: Thanks, Kathy. While I’ve got you, let me ask you another question here. ‘With 10-year yields possibly going up, would that also correlate with mortgage rates also possibly having more upward pressure for 2025?’

KATHY: Yeah, mortgages are priced pretty much off the 10-year, so you could see those move higher from here. It clearly has had a negative impact on the housing market for quite some time. And if yields move up from here another 50 basis points, we can be back at higher mortgage rates, and the flow through to that housing would be negative.

MARK: Alright, thank you.

And then let’s see my list of questions here. I think we touched on this one, but okay, here we go. Liz Ann, ‘Does an overweight to US tech continue to make sense in the current environment?’

LIZ ANN: Well, as I mentioned, the technology sector, sometimes it begs the question… are you’re talking about sort of tech lowercase t in a broad sense that might encompass a lot of the stocks that actually don’t sit in the tech sector, or the actual GIC sector that is S&P information technology. The actual sector, it hasn’t been flat since last June. It’s had a lot of gyrations, but it hasn’t made any headway from a return perspective since last June. It’s communication services in that broader sort of lowercase t tech landscape where the performance has been. That’s in part because Meta is a dominant name within that. Alphabet is within that sector as well. In the case of Meta, as I mentioned, it’s one of the top performers on a year-to-date basis. But that drives the communication services sector.

We have a market perform rating on technology. I think it is a risk given the size that it represents in the cap-weighted indexes to be at an underweight position, but from a valuation perspective, and frankly, just a choppiness and market behavior, given some of the headwinds that the sector is facing, I think it’s also a risk to go to an overweight position in technology. It only adds to that concentration problem that I think faces a lot of investors who look to cap-weighted indexes as some sort of benchmark.

MARK: Thank you, Liz Ann.

Jeff, I’ll send this one to you, and then we’re going to wrap up here. ‘How material are tariff offsets? For example, countries depreciating their currency, substitution through other countries who weren’t subject to the tariffs? What are your thoughts there?’

JEFF: Well, it all depends. Currencies usually adjust to offset the tariff, but that’s in theory. And it isn’t perfect since they’re usually countervailing tariffs. So some of the higher costs does flow through to prices. It is possible to protect some domestic industries with selected tariffs, but across the board tariffs raise prices so much that we don’t typically see growth and investment within that now protected economy. And that’s one reason why I mentioned India cut tariffs this week. They wanted to boost domestic manufacturing by lowering costs for inputs instead of forcing businesses to buy more expensive domestic inputs. So the lingering impact of tariffs has been negative on domestic growth from an economic history perspective.

MARK: Alright, thank you very much.

We’re going to wrap it up right there, and maybe I’ll just ask one kind of one brief follow up question for each of you, and what’s the one or two things you want listeners and viewers to take away from the webcast today? Liz Ann, why don’t we start with you, then we’ll go to Kathy, then we’ll go to Jeff.

LIZ ANN: Sure. So we’ve been operating under this theme of rampant sector volatility that we started to highlight in the midpoint of last year. And I think maybe one of the shifts that’s happening is that some of that sector volatility was driven by election-related issues, but also driven by earnings. Now I think tariff-type announcements and backtracks could exacerbate some of that sector-related volatility, which is why we continue to focus at least as much on factor-based investing as we do. And then within factors still have that high-quality bias, but with a little more of a GARP approach, and maybe related to tariffs, a focus on lower volatility-type names.

MARK: Alright, Kathy?

KATHY: Yeah, I would say we are coming have come into the year with a fairly cautious stance on duration and credit quality reflecting the uncertainty about so many things going on. But we may shift if we get more clarity about the outlook going forward, if the door is open to rate cuts at the end of the year. We don’t want to pre-position for that because valuations don’t suggest there’s a lot of room yet to do that. But volatility creates opportunity. So on the one hand, we’re being very cautious about duration and about credit quality. On the other hand, as we get into the year, and hopefully we see a lot more clarity on what the path forward looks like, then we’ll probably shift to taking advantage of these yields, which are still pretty attractive for longer term investors.

MARK: Alright, Jeff, I’ll give you the last word,

JEFF: Mark, from a negative perspective, the auto sector is likely to be negatively impacted by just lingering concerns over trade barriers. I’ll come back to something I said earlier on the positive side. EAFE does not include Mexico, Canada, China, or the US, and it’s already outperforming this year. From a sector perspective, financials have been among the leaders this year. They’re not directly affected by tariffs, so that’s another place investors could choose to dodge some of the headline-driven volatility. Financials are the biggest sector in the EAFE Index.

MARK: Alright, thanks everybody. We’re out of time. Liz Ann Sonders, Jeff Kleintop, Kathy Jones, thanks for your time today. If you would like to revisit this webcast, we’ll be sending a follow-up email with a replay link. To get credit, to get continuing education credit, you need to have watched for a minimum of 50 minutes, and you must have watched it live. Watching the replay doesn’t count. To get CFP credit, please make sure to enter your CFP number in the window. It should be on your screen right now on the right-hand side. Schwab will submit your credit to the CFP Board on your behalf. For CIMA credit, you’re going to have to submit that on your own. Directions for submitting it can be found in the CIMA widget at the bottom of your screen.

We’ll be back on March 4^th at 8:00 AM Pacific. Jeff, Kathy, and Liz Ann will be with us, as well as Mike Townsend, our Washington analyst. Until then, if you would like to learn more about Schwab’s Insights or for other information, please reach out to your Schwab representative. Thanks again for your time and have a nice day.

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