- Schwab Market Perspective: Moving, With Bottlenecks
- U.S. stocks and economy: Moving, but with bottlenecks
- Global stocks and economy: Different speeds
- Fixed income: Real rates are on the rise
- 5 Best Ways to Invest ,000
- 1. Invest in your 401(k) and get the matching dollars
- 2. Use a robo-advisor
- 3. Open or contribute to an IRA
- 4. Buy commission-free ETFs
- 5. Trade stocks
Schwab Market Perspective: Moving, With Bottlenecks
Listen to the latest audio Schwab Market Perspective.
U.S. economic growth is accelerating as vaccinations rise and social-distancing measures ease, but hopes for a long-lasting spending boom may hit a couple of speed bumps.
Vaccine rollouts in major countries are proceeding at different speeds, but stock market performance contradicts what vaccination data would seem to imply for investors.
Meanwhile, inflation-adjusted longer-term Treasury yields have risen as investors anticipate stronger economic growth.
U.S. stocks and economy: Moving, but with bottlenecks
With regional social-distancing measures easing, mobility is gathering steam and the path to a broader reopening is becoming clearer.
Many believe that the recent massive buildup in savings will be spent quickly as the economy broadly reopens.
However, we think it is premature to assume a long-lasting spending boom will emerge—not only because consumers’ spending habits may have become more prudent, but also because the math for a rebound in services is much different than for goods.
The additional COVID-19-related fiscal relief measures implemented in late 2020/early 2021 bolstered consumers’ finances. As you can see in the chart below, the personal savings rate (unsurprisingly) spiked higher after households were mailed a second round of checks at the end of the year.
Savings jumped after government stimulus checks were mailed to households
Source: Charles Schwab, Bloomberg, as of 1/31/2021.
The next round of aid—the recently-passed American Rescue Plan—includes $1,400 direct cash payments for individuals. Most people plan to save a bulk of this round of relief, followed by paying for food and housing expenses, according to a survey by Bloomberg and Morning Consult in February.
Many argue that these savings will be drawn down quickly as the economy reopens. However, pent-up demand in goods has arguably already been satisfied. The manufacturing sector has seen a marked improvement in demand and general sentiment.
As you can see in the chart below, the Institute for Supply Management’s Manufacturing purchasing managers index (PMI) has stayed firmly in expansionary territory, and in February reached its highest level since December 2018. The rebound has not come without caveats, though.
The prices-paid and supplier-deliveries components have surged, underscoring the disruptions businesses are still experiencing within supply chains.
Strong manufacturing sentiment, albeit with supply-chain issues
Source: Charles Schwab, Bloomberg, as of 2/28/2021.
U.S. stocks have come under some pressure recently, particularly given the rapid rise in the 10-year Treasury yield since the end of February. The Information Technology and Consumer Discretionary sectors have led to the downside, as investors continue to rotate into cyclically oriented sectors, given the prospects for rapidly-accelerating growth this year.
Stocks were arguably ripe for a pullback, given buoyant investor sentiment across nearly every metric.
As you can see in the chart below, SentimenTrader’s Panic/Euphoria Model had risen to a level not seen since the technology boom in the late 1990s, before recent market weakness brought sentiment down to a zone that historically has tended to be better (but not the best) for stock market returns.
A full washout in excessive optimism has yet to occur, and risks may persist if bullishness spikes again and/or market breadth deteriorates. Yet, as is always the case with sentiment, a negative catalyst is typically needed to accelerate stocks’ moves to both the upside and downside.
Euphoric sentiment has edged down from extremely high levels
Source: Charles Schwab, SentimenTrader, as of 3/5/2021. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
Global stocks and economy: Different speeds
In February, markets moved to price in the potential impacts of stimulus and the recovery, while vaccine rollouts in major countries proceeded at different speeds.
The chart below shows vaccine doses administered as a percentage of the total population, revealing starkly different trajectories in these major countries since their first dose was administered.
The United Kingdom was the first country to start vaccinations and remains in the lead among major nations, followed closely by the United States. In comparison, the European Union is lagging and China is far behind, showing little progress through the Lunar New Year holiday.
Vaccination is progressing at different speeds
Source: Charles Schwab, Bloomberg data as of 3/2/2021.
The vaccine-led recovery is arguably the most important factor for stock markets around the world, making this divergence a clear signal to investors about where to shift focus and where to avoid.
But, as is often the case, investing isn’t that simple: The performance of the stock markets in these countries contradicts what the vaccination data would seem to imply for investors.
The best-performing stock market this year has been China, followed by Europe and the U.S.; the U.K. has posted the worst performance year-to-date.
Stock market performance is reverse of rollout progress
Source: Charles Schwab, Bloomberg as of 3/2/2021. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
What drives this counter-intuitive outcome for the markets? China may be the easiest to explain. Its stock market is the best-performing in the world so far this year, even though the vaccine rollout lags other large economies by a wide margin.
China’s targeted public health policy of stringent case containment using public health measures during outbreaks has been effective.
This created little urgency for people to get vaccinated, while the economy has moved forward, unimpeded by broad-based lockdowns.
We aren’t suggesting the vaccine rollouts don’t matter; inoculations are very important to the global economy and markets. Rather, we point out that investors shouldn't get caught up in which country is “winning” the vaccination race.
Sales for global companies, which drive the major indexes, are dependent upon all major countries seeing a vaccine-led recovery in the second half of this year.
Although the UK leads in vaccinations, UK stocks get only about 23% of their revenue domestically and are dependent on foreign trade for the rest, as you can see from the chart below.
The path of vaccinations for the rest of the world is more important to the revenue of companies in the UK than domestic vaccination progress.
Global sales matter more than domestic
Revenue breakdown by country for MSCI United Kingdom Index
Source: Charles Schwab, FactSet data as of 3/3/2021.
We anticipate a ramp-up in vaccination progress in Europe in the coming months, which will contribute to its ability to reopen areas of the economy shuttered during the pandemic.
The EU has secured orders for more Pfizer/BioNTech and Moderna doses, while large European pharmaceutical companies without vaccine candidates are converting factories to produce vaccines from their competitors.
Strong earnings and a global economic recovery are expected later this year, prompted by mass immunizations.
Fixed income: Real rates are on the rise
Bond yields rose to the highest level in a year in early March on signs that the economy is bouncing back from the depths of the downturn last year.
Ten-year Treasury yields moved slightly above the 1.6% level, the highest level in a year. With the passage of the $1.
9 trillion fiscal stimulus package and the pace of vaccinations picking up, the markets are pricing in a strong economic recovery.
Most notably, real interest rates—bond yields adjusted for inflation—have been rising. After dropping to as low as -1.0% last year, 10-year real yields have moved up by about 35 basis points1 to -.0.65%. While still in negative territory, that’s a big move in a short period of time.
Rising real yields reflect optimism about the economic recovery. With the pace of the vaccine rollout picking up and another large fiscal stimulus package passed, markets are beginning to price in a return to more normal interest rate levels.
5 Best Ways to Invest $5,000
A $5,000 windfall is unly to change your life, but it is ly to change how you invest — or give you a jumping-off point to start investing, if you’re not already.
That’s why we’ve narrowed things down to the five best ways to invest $5,000. One of these is bound to suit your risk tolerance and goals, and all of them are within reach.
1. Invest in your 401(k) and get the matching dollars
If you have a 401(k), your company offers to match your contributions and you’re not taking it up on that offer, this decision is a no-brainer: Go after that match. Many companies match half or all of your contributions, up to 3% to 6% of your salary. It’s the highest guaranteed return in investing.
You typically can’t deposit a lump sum $5,000 into your 401(k), but you may find that having that money in the bank gives you room in your budget to start grabbing those matching dollars. Those 401(k) contributions will make your paycheck smaller, but you can repay yourself from that $5,000, either after each paycheck or whenever money runs short for the month.
» Are you on track for retirement? Find out with our 401(k) calculator.
|NerdWallet rating NerdWallet's ratings are determined by our editorial team. The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities.||NerdWallet rating NerdWallet's ratings are determined by our editorial team. The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities.||NerdWallet rating NerdWallet's ratings are determined by our editorial team. The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities.|
2. Use a robo-advisor
You could build a portfolio of ETFs, or you could have one of these computer-driven advisors manage a pre-built portfolio for you. Robo-advisors offer complete portfolio management.
You’ll pay for taking the easy way out, generally a management fee of 0.25% to 0.35% of your account balance per year on top of the ETF expense ratios. However, there are a few free options.
Wealthfront has a $500 minimum and manages up to $5,000 for free. Axos Invest has no minimum and is free indefinitely.
Charles Schwab’s advisor, Intelligent Portfolios, requires $5,000 and uses its own funds but charges no management fee.
» Ready to call in the robots? Our picks for the best robo-advisors
3. Open or contribute to an IRA
The annual IRA contribution limit is $6,000 in 2020 and 2021 ($7,000 if age 50 or older) so you’re just a hair away from reaching it. Being that close might motivate you to pinch together the rest, but even if it doesn’t, an individual retirement account is the best home for this money if you don’t have a 401(k) or you’ve already gotten your matching dollars.
a 401(k), an IRA is a retirement account, but you don’t need an employer to have one. You can open an IRA at any online broker. Many don’t have an account minimum; those that do either require much less than $5,000 or waive their minimum for an IRA.
For more, see our list of the best IRA account providers.
4. Buy commission-free ETFs
A $5,000 investment gets you past most standard mutual fund and index fund minimums, which typically hover between $1,000 and $3,000. But one or two mutual funds do not a diversified portfolio make.
(The exception is target-date funds, which are inherently diversified so you can put your full investment in a single fund.
These can have high expense ratios but are one option for investors who prefer to be hands-off.)
Investing in five $1,000-minimum index funds would buy you an equal share of the five kinds of investments tracked by those funds, which probably isn’t the portfolio you want.
Enter exchange-traded funds, which you can buy through that IRA or an online brokerage account. ETFs are index funds that trade a stock.
You avoid the whole song and dance with minimums and instead buy in for a share price that is, in most cases, much lower than the typical fund minimum.
You can buy more funds, get more diversification and spread your money in a way that makes sense for your age and risk tolerance.
ETFs tend to have low expense ratios, but you’ll want to focus on commission-free ETFs so you’re not paying a fee each time you buy or sell. Those fees can run up to $10 and really drag down a small investment. Most brokers offer a list of commission-free ETFs.
» View the best brokers for ETF investors
5. Trade stocks
Trading stocks has a kind of allure, and if you’ve been feeling the pull, now may be the time to do something about it — with a very small percentage of your portfolio. We recommend limiting buying stocks to 10% or less and dedicating the rest of your money to low-cost funds geared toward retirement.
» Learn more: How to buy stocks
Those pesky commissions pop up again here, too. Avoid or limit fees by using a low-cost broker or free trading app.