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The Market -Economy Disconnect - Charles Schwab...This has led many to worry about the growing...

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Key Points: 1. The first half of 2020 has had more than its share of unprecedented occurrences 2. The global market and economic decline has been met with a strong fiscal and monetary response 3. Though markets have recovered, there is still much uncertainty about the strength of the economic rebound and the COVID-19 pandemic. The Market -Economy Disconnect July 2020 QUADRANT N. ONE PART OF A CIRCLE THAT IS EVENLY DIVIDED INTO FOUR PARTS. AN INSTRUMENT USED FOR TAKING ANGULAR MEASUREMENTS OF ALTITUDE IN ASTRONOMY AND NAVIGATION. Quadrant A Quarterly Update The “U” Word A quick Google Trend search of the word “unprecedented” might provide one of the best visual descriptions of the current state of the global health and economic crisis. The previous spike took place in December 2016 after the U.S. presidential election. We will strive to avoid the “U” word in the remainder of this piece, but no promises. Chart 1: Google Trend searches for the word “unprecedented” The second quarter of 2020 was a quarter of extreme economic uncertainty amid the ongoing global health crisis. The world economy continued to contract and unemployment continued to rise. The International Monetary Fund (IMF) predicts that the global economy will contract almost 5% 1 in 2020. Let’s put this into The chart above is an indication of interest over time: Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means there was not enough data for this term. perspective: the World Economic Outlook Database of the IMF goes back to 1980, admittedly not the longest time series; that said, real annual global economic GDP growth has never dipped into negative territory with the exception of a small blip (-0.07%) in 2009. Closer to home, unemployment in the United States has hit 13%, towering over any other recession peak in the post-war period and continuing jobless claims are at levels never seen in the history of that data release.
Transcript
Page 1: The Market -Economy Disconnect - Charles Schwab...This has led many to worry about the growing disconnect between the market and the economy. However, there is an important factor

Key Points:

1. The first half of 2020 has had more than its share of unprecedented occurrences

2. The global market and economic decline has been met with a strong fiscal and monetary response

3. Though markets have recovered, there is still much uncertainty about the strength of the economic rebound and the COVID-19 pandemic.

The Market -Economy Disconnect July 2020

QUADRANT N. ONE PART OF A CIRCLE THAT IS EVENLY DIVIDED INTO FOUR PARTS.

AN INSTRUMENT USED FOR TAKING ANGULAR MEASUREMENTS OF ALTITUDE IN ASTRONOMY AND NAVIGATION.

QuadrantA Quarterly Update

The “U” Word

A quick Google Trend search of the word “unprecedented” might provide one of the best visual descriptions of the current state of the global health and economic crisis. The previous spike took place in December 2016 after the U.S. presidential election. We will strive to avoid the “U” word in the remainder of this piece, but no promises.

Chart 1: Google Trend searches for the word “unprecedented” The second quarter of 2020 was a quarter of extreme economic uncertainty amid the ongoing global health crisis. The world economy continued to contract and unemployment continued to rise. The International Monetary Fund (IMF) predicts that the global economy will contract almost 5%1 in 2020. Let’s put this into

The chart above is an indication of interest over time: Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means there was not enough data for this term.

perspective: the World Economic Outlook Database of the IMF goes back to 1980, admittedly not the longest time series; that said, real annual global economic GDP growth has never dipped into negative territory with the exception of a small blip (-0.07%) in 2009.

Closer to home, unemployment in the United States has hit 13%, towering over any other recession peak in the post-war period and continuing jobless claims are at levels never seen in the history of that data release.

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GLOBAL ADJ. OF OR RELATING TO THE WHOLE WORLD.

RELATING TO OR EMBRACING THE WHOLE OF SOMETHING, OR OF A GROUP OF THINGS.

Chart 2: Unemployment rate in the United States at the highest in the post-war period

For a global economy that is set to experience the deepest economic recession in history, a single digit negative return year-to-date2 for global stocks would appear rather benign. Since end of March, a strong rally in global equities has been flying in the face of economic recession. This has led many to worry about the growing disconnect between the market and the economy. However, there is an important factor that has contributed to the market rebound: fiscal and monetary policy support globally that has been aggressive and more proactive than in the past. In the United States, the balance sheet of the Federal Reserve (Fed) has grown 70% since the beginning of March. While this is comparable to the Fed’s action during the 2008 financial crisis, the fiscal response in the United States has been larger. In sum, the Paycheck Protection Program and Health Care Enhancement Act, Coronavirus Aid Relief and Economy Security Act (“CARES Act”), Coronavirus Preparedness and Response Supplemental Appropriations Act, and Families First Coronavirus Response Act amount to about $3 trillion dollars – which is about twice the dollar amount pledged by the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, combined.

As a result, U.S. household disposable income has remained reasonably intact, and the mix of policy aggressiveness and subsequent gradual reopening of the economy has driven the S&P 500 to its strongest quarter since 1998 after experiencing the worst quarter in its history during the first quarter.

Looking Ahead: It Ain’t Over Till it’s Over

Looking at year-to-date equity market performance, it would appear that the world went through a negative shock but is now on the mend. While we all hope that the near future holds ever improving news on the health and economic front, the outlook remains uncertain.

On the positive side, policy makers remain ready to support economies and markets; moreover, the scientific community continues to work at record breaking speed to find cures and vaccines to solve the health crisis. On the downside, the current pandemic would appear hardly under control, in particular in the world’s largest economy – as the change in daily cases in the United States in chart 4 would suggest. Therefore, the jury is still out on whether this will remain a short term shock or whether it will last longer than markets expect and how different countries and regions will be impacted.

Chart 3: Continuing jobless claims also at the highest in the post-war period

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TO IDENTIFY CLEAR BROADER GOALS THAT ADVANCE THE OVERALL ORGANIZATION AND ORGANIZE RESOURCES.

STRATEGY N. A PLAN OF ACTION OR POLICY DESIGNED TO ACHIEVE A MAJOR AIM.

As the charts below indicate, closing efficiently and enabling a safe reopening are key to economic rebound: the Chinese economy would appear to have successfully controlled the spreading of the virus and put the economy back on track for expansion as their recent Purchasing Manager Index (PMI) print above 50 would indicate; PMIs in the rest of the world are trending in the right direction since the April lows, but the large increase in cases in the U.S. remains a source of uncertainty.

Chart 4: Covid-19 Cases – daily change Chart 5: Composite Purchase Managers Indices

Windhaven Strategies Positioning

The second quarter saw two trading periods in the Windhaven Diversified Strategies, one in early May and the other during the first week of June. The overall theme of these adjustments was a cautious reintroduction of risk assets on the heels of the sharp risk reduction trades in March, when stock markets were in the midst of historic declines. As the dust settled and the recovery began, our research process indicated that the outlook for two U.S. equity categories was improving: U.S. large cap and healthcare stocks. Both were funded in the quarter using proceeds from sales of commodities and fixed income ETFs; while the overall allocation to bond ETFs was reduced in the quarter, we did add to our holdings in a TIPs (Treasury Inflation Protected Security) ETF. Though oil prices have recovered from their precipitous decline earlier in the year, the outlook remains murky, and because oil is a large component of the more diversified commodity ETFs, a poor outlook for oil has an outsized effect for the entire asset class. The only individual commodity in the Windhaven research universe is gold, which unlike oil, is nearing all-time highs not seen since 2011, and has proven to be a very productive tactical holding in all three strategies. While gold price changes are difficult to predict and often hard to analyze even after the fact, it seems that a combination of market volatility, the COVID-19 pandemic, deficit spending, falling rates and global unrest have led to a continuation of an upward trend that began in 2018.

When we discuss the overall positioning of the three Windhaven strategies, we typically do so in the context of Market Protection and Market Participation. The strategies are designed to adjust their allocations over time in order to participate to a greater extent in markets when the environment is favorable, while seeking to protect when the risks outweigh the returns. Market Participation assets include all the equity categories in the

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LOG: N. AN OFFICIAL RECORD OF EVENTS DURING THE VOYAGE OF A SHIP OR AIRCRAFT.

V. MAKE A SYSTEMATIC RECORDING OF; EVENTS, OBSERVATIONS, OR MEASUREMENTS.

Sources: 1 https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020. 2 Global equities measured by the MSCI All Country World Index were down 6.0% as of 6/30/2020.

Important Notes and Disclosures:Portfolio Management for the Windhaven Strategies is provided by Charles Schwab Investment Management, Inc. (“CSIM”). CSIM is a registered investment adviser and an affiliate of Charles Schwab & Co, Inc. (“Schwab”). Both CSIM and Schwab are separate entities and subsidiaries of The Charles Schwab Corporation.

The information provided herein is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed and CSIM expressly disclaims any liability, including incidental or consequential damages, arising from errors or omissions in this publication.

Allocations do not necessarily reflect our current investment views and should not be used as the basis for investment decisions. Holdings of individual client portfolios may differ, sometimes significantly, from those shown in the model allocation charts above. Asset classes and the proportional weightings in the strategies may change at any time without notice subject to the discretion of the Windhaven Strategies Portfolio Management Team. Cash positions whether in US dollars or other currency are included in the relevant fixed income section. Hard Assets are physical assets and may include exposure to gold, commodities and energy.

Past performance is no guarantee of future results.

International investments may involve additional risks, which could include differences in financial accounting standards, currency fluctuations, political instability, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

Hard assets can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. CSIM’s risk management process includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk or the ability to control risk. Please refer to the Windhaven Strategies Disclosure Brochure for additional information.

(0720-0K64)

U.S. and across the globe, REITs (Real Estate Investment Trusts), and commodities, while Market Protection assets are mostly comprised of bonds.

Entering 2020, the Windhaven strategies were moderately tilted toward participation with a healthy allocation to ETFs invested in stocks and REITs. As the crisis unfolded, swift and decisive action was taken during three trading periods in March to reduce risk and move the needle firmly into protection territory. Today, the strategies remain modestly tilted toward protection, and within each of the asset categories, there is a focus on risk control. The equity allocation remains overweight U.S stocks and underweight international and emerging markets. There are no REIT ETF holdings at this time. Within fixed income, there is an emphasis on high quality and limited exposure to interest rate risk. The allocation to hard assets remains modest, and is mostly comprised of gold. However, as highlighted previously, the situation in the global economy and markets remains quite fluid, and we stand ready to follow our investment process and adjust the strategies as the environment changes.

We appreciate your investment in the Windhaven Strategies. Please contact your Investment Professional if your investment objectives or circumstances have changed such that a review of your Windhaven Strategy account(s) might be necessary, or if you have any specific questions about how your account is managed. We value the trust our clients have placed in us, and we are passionate about the Windhaven Strategies and the role they play in helping each of you reach your investment goals.

-The Windhaven Strategies Portfolio Management Team


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