In early March, a couple of U.S. banks failed with a few more having their stocks come under severe pressure. We won’t rehash the details of those situations since we have written about them previously. RSWA Blog RSWA Blog Today’s focus will be on Charles Schwab since it has been in the news and its stock has also come under pressure.
Charles Schwab has both brokerage and bank businesses. The company’s stock is under pressure for a couple of reasons, but it's the bank division that has been getting most of the press lately. It is worth noting that all bank stocks have performed poorly since the beginning of March, especially regional or local banks. As of the market close on April 4th, the regional bank index ETF is down 30.64%. Schwab’s stock has performed a little worse than that and is down 35.41% (see chart below). Overall, the whole sector has struggled.
Chart: Morningstar
Like many banks, Schwab receives deposits from investors and invests those deposits in bonds. Schwab bought high-quality, long-maturity bonds with those deposits. They did not anticipate that the Fed rates would increase so aggressively and when they did, the value of the bonds they held dropped significantly. The losses are only on paper and will only become a problem if depositors leave, whereby Schwab will have to come up with cash to pay depositors. If Schwab should need cash, there is cash on their balance sheet along with access to credit facilities from the Federal Reserve. They should never need to sell the bonds and can hold them to maturity without losses. Depositors would have to leave for the company to need cash and most analysts don’t think that will happen. Most client deposits at Schwab are under the $250,000 FDIC insurance limit. That was not the case with the bankrupt banks where most of the clients had balances significantly above the FDIC limit which caused them to pull deposits.
SCHW Had A Lofty Share Price: Another reason Schwab’s stock is down is that it was pricey and earnings expectations have been revised downward. At the beginning of March, the stock was trading at about 21 times earnings while the overall stock market was at about 15 times earnings. And on top of that, earnings expectations have fallen. Schwab had been making a lot of money off of clients’ uninvested cash, but many clients are moving funds into Schwab money markets which pay higher rates. Schwab will collect a management fee for the money markets, but it will equate to less revenue and profit. In January, analyst consensus was that Q1 earnings would come in for Schwab at $1.09 per share but that now stands at $.94 per share. This is happening across the brokerage sector. For example, another large brokerage firm, LPL Holdings, is down 24% from March 1st through April 4th.
NYT – Why Schwab Got Hit in the Panic Over Regional Banks
Charles Schwab & Company – Updated: Our Most Recent Perspective on Industry Events | About Schwab
Analysts SCHW Projections: As institutional investors, our firm has access to several analyst reports for Schwab. The most recent and updated reports have a buy rating on Schwab stock with a twelve-month target price higher than the current stock price. We are not suggesting anyone go out and buy the stock, but want to highlight the confidence stock analysts have in Schwab’s company and future outlook. (Unfortunately, we can only link to one source because the others are not approved for distribution.) Morningstar
RSWA Account Custody: The topic of Schwab is not a passing interest for us. Schwab has custody of our clients’ accounts, and we have fielded a few questions from clients about the firm. We intently keep up with all news and articles about the Schwab. From all that we have read and researched, there is nothing that causes us to have concerns at this time.
Employment Update: On Friday, the U.S. Employment Report will be released giving the latest insights into the job market. But earlier this week the report showing how many job openings, a measure of labor demand, was released. It showed job openings for February were down 632,000 from January and fell below 10 million openings for the first time in two years. The 9.9 million job openings were a decline of 1.3 million for the first two months of the year. The drop in openings is a sign that the labor market conditions may be easing somewhat. MSN/Reuters
Financial Planning/Investment Strategy Corner:
Planning For a Long Retirement: Retirees are living longer than ever and much longer than in the past. In 1970, U.S. men lived about 12 years in retirement with women lived about 16 years in retirement. But people are retiring at an earlier age either due to health reasons or because of buy-out incentives from companies. According to a Gallup poll in 2022, the average retirement age was 61. Retiring earlier along with living longer has meant longer retirement periods. In 2020, the average retirement was expected to be 16 years for men and 21 years for women. We spend a lot of time modeling out financial projections for clients and usually plan for men to live to 92 and women to live to 94 (sorry guys!). We use those numbers because actuaries state people have a 30% chance of living that long. For clients who have longevity running in their families, we can push life expectancy out further and plan for their funds to last longer. Planning for a long and fulfilling retirement for clients is one of the joys of our profession. If you have questions about how long to plan for your retirement, please reach out to your advisor. U.S. News – What is the Average Retirement Age?
The Economist – Retirement Has Become Much Longer Across the Rich World
Quick Hits:
- The benefits of ‘deep time thinking’: BBC
- The snack bag of the future, won’t be made from plastic: Bloomberg
- Why friendships for men are important and why there may be a “friendship recession”: Greater Good
- How to create your optimal bedtime routine: Wired
- Give your brain a workout by listening to music: Axios
- The Future Library in Norway has unreadable books from authors that won’t be available for 100 years. A forest was planted around the library and the mature trees will be used to create the physical books: BBC Future Library
Improving Your Posture Can Improve Your Mood and Performance: Many of us spend our days at a desk or hunched over our phones which can lead to poor posture. Most people think bad posture only affects their neck, back, or shoulders. But research is linking posture to affecting mood, confidence, or even how students perform on tests. Click on the links to learn more as well as how to improve your posture. Axios – Link Between Posture and Mood PickTheBrain – How to Improve Your Posture in 5 Minutes
Quote: “Retirement at sixty-five is ridiculous. When I was sixty-five I still had pimples.” George Burns
Thank you for reading RSWA Financial Advisor Insights! We welcome feedback and please forward this to a friend! Be well, take care, and stay safe!
