Finance

Schwab, one of the biggest U.S. brokerages along with competitors like Fidelity, Interactive Brokers and upstart Robinhood, has benefited mightily from rising stock markets and increased retail participation during the pandemic.
The raises “will be applied to the vast majority of the company’s employees, effective late September 2021,” the company said.
The Westlake, Texas based firm also said that it was pushing back its return-to-office plans until January 2022 at the earliest because of the more contagious delta variant of the coronavirus.

A pedestrian passes in front of a Charles Schwab Corp. bank branch in downtown Chicago, Illinois.
Christopher Dilts | Bloomberg | Getty Images

Brokerage Charles Schwab is giving most of its employees a special 5% pay raise as record stock market levels propel the industry’s earnings.
CEO Walt Bettinger said Thursday in a press release that he wanted to reward employees “for their contributions and their relentless commitment to see the world through clients’ eyes, even during the most challenging times.”

Schwab, one of the biggest U.S. brokerages along with competitors like Fidelity, Interactive Brokers and upstart Robinhood, has benefited mightily from rising stock markets and increased retail participation during the pandemic. Schwab said that in the first half of the year, clients opened 4.8 million new accounts and new assets totaled $257 billion, double the year-earlier amount.
The raises “will be applied to the vast majority of the company’s employees, effective late September 2021,” the company said. “It will not include the company’s Executive Council or colleagues participating in Schwab’s incentive compensation plans.”
The Westlake, Texas based firm also said that it was pushing back its return-to-office plans until January 2022 at the earliest because of the more contagious delta variant of the coronavirus.

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The Macy’s Inc. logo is displayed on a monitor at the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Feb. 22, 2016.
Michael Nagle | Bloomberg | Getty Images

Check out the companies making headlines in midday trading.
Macy’s — The retail giant saw its stock surge 19.6% after reporting quarterly earnings and revenue that beat analysts’ estimates. Macy’s reported an increase in comparable-store sales, raised its annual sales forecast, and also announced a share buyback and the reinstatement of its dividend.

Kohl’s — Kohl’s shares jumped 7.3% after the retailer posted quarterly results topping analysts’ forecasts. Kohl’s reported adjusted quarterly earnings of $2.48 per share, well above the $1.21 consensus estimate, according to Refinitiv. The company said higher foot traffic drove sales in the second quarter and also raised its full-year forecast.
Nvidia — Nvidia’s stock gained nearly 4% after the chip giant’s quarterly earnings and revenue beat Wall Street estimates amid strong graphics cards sales. Nvidia reported its results on Wednesday.
Robinhood — The retail trading app’s stock fell 10.3% after reporting quarterly results Wednesday for the first time as a public company. The company recorded a 131% surge in quarterly revenue for the second quarter, compared with the same time a year ago. However, analysts are worried by how much the meme-based crypto dogecoin accounts for trading activity as well as Robinhood’s warning of a slowdown in third-quarter trading activity.
Tapestry — Shares of Tapestry, whose brands include Coach and Kate Spade, fell 3.1% despite its quarterly sales beating estimates. Tapestry also reinstated its dividend and share buyback program.
Petco — Petco’s stock gained 3.6% after the pet products retailer posted adjusted quarterly earnings of 25 cents per share, 5 cents higher than expected, according to Refiniv. The company also raised its full-year earnings and revenue outlook.

BJ’s Wholesale — The warehouse retailer stock jumped 4% after the company beat estimates on the top and bottom lines for its latest quarter. BJ’s earned an adjusted 82 cents per share for the second quarter, 17 cents above estimates, according to Refinitiv.
Cisco Systems — Shares of Cisco jumped 3.8% after the networking equipment and services company beat on quarterly earnings. Cisco reported earnings of 84 cents per share on revenue of $13.13 billion. Analysts had expected earnings of 82 cents per share on revenue of $13.03 billion, according to Refinitiv.
Bath & Body Works — Shares of the personal care products retailer rose 10.5% after reporting its quarterly results for the first time since it rebranded from L Brands, after spinning off Victoria’s Secret. The company reported $1.7 billion in sales for the second quarter and earnings per share of $1.34.
Victoria’s Secret — The women’s apparel stock fell 3.5% after reporting quarterly sales that fell short of analysts’ expectations. However, the company recorded improved profit margins from tighter inventories and running fewer promotions.
— CNBC’s Tanaya Macheel and Jesse Pound contributed reporting

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ARK Invest’s Cathie Wood on Thursday defended her innovation-focused strategies in the wake of investors betting against her funds.
“I don’t think we’re in a bubble which is what I think many bears think we are,” Wood said Thursday on CNBC’s “Tech Check.” “In a bubble, and I remember the late ’90s, our strategies would have been cheered on. You remember the leap frogging of analysts making estimates one higher than the other, price targets one higher than the other. We have nothing like that right now. In fact, you see a lot of IPOs or [special purpose acquisition companies] coming out and falling to earth. We couldn’t be further away from a bubble.”

On Monday, regulatory filings spotted by CNBC Pro showed Michael Burry bet against Woods’ Ark Innovation ETF using options. Burry’s Scion Asset Management bought 2,355 put contracts against the red-hot tech ETF during the second quarter and held them through the end of the period. Burry was one of the first investors to call and profit from the subprime mortgage crisis.
Other hedge funds also have put bets and other short bets against the firm’s ETFs.
“When I see such negative sentiment out there, especially when it comes to valuation and longer time horizons, investment time horizons, I actually feel a little more comfortable. I like bad news,” Wood added. “The discounting is worse now than the news actually will be. I actually feel better in that environment for our strategies.”

Wood said that much of the bearishness on her funds is focused around inflation and interest rates going higher. However, the portfolio manager’s macro thesis focuses on deflation from innovation.
“The innovation around which we have centered our research, these five platforms: DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technology, are barely off the ground,” Wood said.

Arrows pointing outwards

Shares of Wood’s flagship fund, Ark Innovation, hit a bottom in May as investors rotated into value stocks in the first half of 2021 and out of tech shares. The ETF did end the second quarter up 9%, but it’s still down 7% year to date.
ARKK traded down on Thursday.
“The seeds for all of these platforms were planted in the 20 years that ended in the tech and telecom bust and ended in tears and there’s a lot of muscle memory around that but that’s not what’s going on right now. I don’t think the market is ready for this. We’ve never been at a more provocative time for innovation in history,” Wood said.
Wood made a name for herself after a banner 2020 in which Ark Innovation returned nearly 150%. The fund had big holdings in stocks such as Zoom and Teladoc, which thrived during the pandemic. The ETF ballooned with investors hoping to get a piece of the “disruptive innovation” names that Wood touts on her popular YouTube channel. The fund’s assets under management are now more than $22.5 billion, according to FactSet.

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FLUSH with stimulus cash and a hoard of savings, consumers have powered America’s recovery. But the fervour is cooling. Figures released on August 17th showed that retail spending shrank by 1% in July compared with the previous month. Some of that could reflect disruption to the supply of cars. But caution about covid-19 may be playing a role too. Sentiment has fallen steeply, and mobility indicators have stalled.■Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

JUST TWO years ago the future of investing seemed to involve fewer and fewer people. Retail investors were piling into “passive” index funds, which track a broad basket of stocks for a tiny fee. Active fund managers, whether swaggering hedge-fund gurus or staid mutual-fund bosses, were in retreat as index and quantitative funds swelled. More automation seemed inevitable. A future in which human investors vanished altogether, replaced by slick, powerful machines swapping shares at near-lightspeed seemed just around the corner.That is not quite how things have turned out. A mass of active retail traders have been romping around the American stockmarket for more than a year. They piled into short-dated derivative bets on Tesla, an electric-vehicle maker, and bid up shares in Hertz, a car-rental firm, after it went bankrupt. Early this year came their pièce de résistance: a frantic rally in the shares of GameStop, a video-game retailer, which rose by 2,000% in a little over two weeks. So volatile was the share price and so large the flows that the stock-settlement system nearly broke.The proximate causes for the retail renaissance are hard to disentangle. Lockdown-induced boredom and stimulus cheques are often cited as fuel for the active retail investor. But the pandemic swiftly followed a price war in October 2019, when America’s largest brokers all cut commissions to zero, copying Robinhood, a digital upstart. And retail access to sophisticated trading tools, such as leverage and derivatives, has long been growing. Between October 2019 and February 2020 trading volumes at retail brokers almost doubled from a low level, before doubling again once lockdowns began.Almost two years on from the price war it is clearly much more fashionable to be obsessed by the stockmarket and hang out on Reddit swapping tips than it is to be coolly indifferent. But how big has the shift towards active retail trading really been? Is passive now passé?These questions can be answered in three ways. The first is by examining the number of retail traders. In 2019 around 59m Americans had accounts with one of seven of the largest brokers. This number has surged since to 95m, as 17m new accounts were opened in 2020 and 20m were set up this year.Next, consider trading flows. These suggest an almighty spike. Retail trading went from around a quarter of volumes to a third in early 2020 and peaked at over 40% in the first quarter of 2021 (once marketmakers, who stand in the middle of every trade, are excluded). The plurality of trading activity now comes from retail punters, not institutions, quants or banks.Third, look at asset holdings. According to Goldman Sachs, a bank, the share of American stocks held directly by households has been falling for decades as investing has become dominated by professionals. In the 1970s and 1980s pension funds rose to prominence, before active mutual funds gained market share in the 1990s and 2000s. Over the past decade passive funds have gobbled up assets. But the share held by households directly began to stabilise around 2015 and is climbing again: between the end of 2019 and March 2021 the share of stocks held by households climbed from 36% to 38%.All this makes the active retail surge seem vast. But two things should give you pause. First, the rise of the active retail investor has not derailed growth in passive ones. Though the total slice of equities passively tracking an index is hard to measure, the share of the S&P 500 held in exchange-traded and mutual index funds has risen by around 0.5 percentage points since 2019, to 18.3%. That is slower than in preceding years, but still a relentless march upwards.Furthermore, not everyone who has opened a brokerage account since 2019 is a day-trader. On average the 32m account holders at Charles Schwab (which recently merged with TD Ameritrade) trade around four times a month. This is more active than Vanguard customers, who seem positively idle (three-quarters of them do not trade at all in a year) but leisurely compared with the 34 or so trades that the 1.5m customers of Interactive Brokers, another retail broker, make every month.Active retail traders, then, are clearly a force to be reckoned with. And if their ascent was prompted by the structural changes to access to trading rather than a passing pandemic fad, then they will remain so. Yet it is worth remembering that most retail investors still trade at a sedate pace.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Jacks are all traders” More

IT HAS BEEN a long few months for the emerging world. Punishing temperatures—July was the hottest month on record worldwide, according to a recent analysis—fanned fires on Turkey’s Mediterranean shores and scorched Russia’s wheat fields. Covid-19 rages across countries with low vaccination rates. Just 24% of Brazilians, 9% of Indians and 7% of South Africans are double-jabbed. On top of everything else, inflation is running hot, too.Soaring food and energy prices have pushed inflation to uncomfortably high levels. In Brazil consumer prices are 9% higher than they were a year ago (see chart), more than twice the central bank’s target. In Russia inflation is 6.5%, well above the central bank’s aim of 4%. Inflation in India, which had been high in 2020, rose above 6% this summer—north of the Reserve Bank’s target range. Policymakers in poorer countries have navigated a fraught path this year. The outbreak of high prices lays another severe test at their feet.Growth has mostly resumed, despite the continued ravages of covid-19. In parts of the emerging world, such as India, output has already regained its pre-pandemic level. In others, such as Russia, it is expected to do so by the end of the year. Soaring prices for oil, metals and agricultural products have been a boon for commodity exporters. But recoveries have been frustratingly uneven. Better times for export industries have not always translated into broader labour-market recovery. Business is booming in Brazil’s mining towns, for instance, but the unemployment rate across the country, at 14.6%, has scarcely declined from its pandemic peak.That, in turn, has placed pressure on governments to extend or even increase spending on relief programmes. Economic growth is boosting tax revenues in many countries, improving the public finances that were battered by covid-19. Still, fiscal deficits remain large. A decision in June to expand grain handouts means that India’s central government is likely to borrow more than the 6.8% of GDP expected in the budget for the 2022 fiscal year. Brazil, which borrowed an eye-watering 13.4% of GDP last year, has extended its emergency cash transfers. Chile and Colombia, which limited their borrowing to a modest 7% of GDP in 2020 last year, are planning to borrow about as much or more this year, according to the Institute of International Finance, a bankers’ group.When you combine more money flowing through the economy with supply disruptions, though, the result is inflationary pressure. Emerging-market central bankers, like their rich-world counterparts, argue that high inflation is merely temporary. But, unlike their advanced-economy peers, some have not felt comfortable enough to wait and see. They have more recent experience of bouts of high inflation, and doubt that public expectations of low inflation are as firmly anchored as in rich countries. They have thus moved forcefully to rein in inflation. Brazil’s central bank raised interest rates by a full percentage point on August 4th, on top of three increases of 0.75 percentage points each since March. The Central Bank of Russia also announced a full-point rise on July 23rd, also its fourth of the year. Mexico and Peru raised interest rates on August 12th. Other central banks that have held fire are expected to tighten in coming months.This determination to curb inflation may have kept foreign investors interested. Early this year some economists worried that a roaring recovery in America and the prospect of higher interest rates there could lead to a rush of money out of emerging economies: an echo of the “taper tantrum” of 2013, when the Federal Reserve began normalising monetary policy after the financial crisis. An uptick in American Treasury yields in February and March this year was accompanied by a slowdown in portfolio flows to emerging markets, seemingly presaging worse to come.That has not materialised, however, and not only because Treasury yields have dropped back from their spring highs. It also reflects a more robust policy framework in emerging economies, and greater resilience to market swings. In recent decades they have built up foreign-exchange reserves and limited their dependence on foreign-currency debt. Most survived a severe squeeze in March 2020, when panicked investors rushed to havens and emerging markets’ currencies tumbled, with minimal economic damage.By comparison, recent exchange-rate wobbles have been modest, which has limited the extent to which higher import prices add to inflationary pressure. So far this year the Brazilian real and the Indian rupee have weakened against the dollar by about 2%. (The real sank by nearly a quarter last year, and by about 20% during the ructions of 2013.) Vigilant central banks probably helped keep investors from growing skittish.But higher interest rates are tough medicine at home. Large increases pose a risk to growth. Slower growth in turn hurts the public coffers, even as higher interest rates raise governments’ borrowing costs. Among the large emerging economies, the risk of a crisis is perhaps most palpable in Brazil, where a loss of confidence in the public finances contributed to a deep recession in 2015 and 2016. If the fiscal risk premium that bond-buyers demand continues to rise, then the government may soon face a terrible choice between slashing spending while unemployment remains high and a full-blown fiscal crisis. Indeed, on August 12th Roberto Campos Neto, the head of Brazil’s central bank, fretted that markets were beginning to perceive a “fiscal deterioration” that could jeopardise economic recovery.Recent woes only make the inflation problem starker—and at risk of spilling over to other countries. A severe drought in Brazil has reduced the capacity of its hydroelectric plants and sent energy prices soaring. It also threatens the production of export crops like coffee, leading to reduced supplies and higher prices. Low levels of the Paraná river have forced firms like Vale, a mining company, to reduce the loads of iron ore being carried on barges, causing global shortages. Russia’s government is taxing wheat shipments abroad, contributing to higher prices worldwide.The fever could break later in the year, as bottlenecks ease and as demand from America and China cools a little. Yet there is also a risk of new disruptions: fresh outbreaks of covid-19, more natural disasters or social unrest, perhaps related to higher food prices. And for exporters like Brazil, softer commodity prices bring their own problems, such as a tumbling currency and an economic slowdown. A turn for the worse in one country could sour investor sentiment towards other places. Emerging markets have handled the economic strains of the past 18 months with fortitude. But a break in the heat cannot come soon enough. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Feeling the heat” More

ECONOMISTS TEND to be big fans of education, which is perhaps not surprising given how much of it they consume and how well their textbooks can do. Alfred Marshall, writing in 1873, hoped that education would help erase the “distinction between working men and gentlemen”. Gary Becker of the University of Chicago reimagined education as an investment in “human capital” that would earn a return in the market much like other assets. Harvard University’s Greg Mankiw, whose books have educated more than most, once calculated that differences in human capital between countries could account for much of their otherwise inexplicable differences in prosperity.But economics can also be scathing about schooling. The theory of signalling likens many educational credentials to peacock’s tails: costly encumbrances, useful only as conspicuous proof that their owners are intellectually strong enough to bear them. And in “The Social Limits to Growth”, a book published in 1976, Fred Hirsch, once a writer for this newspaper, pointed out that education is often “positional” in nature. What matters is not only how much you have, but whether you have more than the next person. For many students it is not enough merely to acquire a good education. They must obtain a better education than the people jostling with them in the queue for sought-after jobs.Positional goods are, by their nature, in strictly limited supply. Everyone can in principle live in a good neighbourhood, attend a good school, and work in a good job. But logic sadly dictates that not everyone can enjoy the nicest neighbourhoods, best schools or most prestigious jobs. As Hirsch pointed out, “what each of us can achieve, all cannot.”An unhappy corollary is that one family’s outlays on schooling raise the bar for everyone else. Families are drawn, often unwittingly, into educational arms races. They spend money and time on after-school tutoring or extra-curricular activities (so-called shadow education) in the expectation that it will improve their child’s position in the queue for advancement. But they quickly discover that everyone else is doing the same, leaving them in the same position as before. They are in fact worse off, because of the costs and frustration incurred. “If everyone stands on tiptoe, no one sees better,” Hirsch noted. And their feet also hurt.These arms races are often particularly ferocious in East Asia. In China and South Korea, schoolchildren face nationwide “high-stakes” tests—the gaokao in China and the suneung in South Korea—that play a big role in determining whether and where they can go to university. In China’s cities, pupils spent 10.6 hours a week on after-school tutoring, according to a report by Frost & Sullivan, a market-research firm.The governments in both countries have tried to orchestrate a kind of collective disarmament. South Korea imposed a 10pm curfew on cramming schools in 2009. Inspectors would go on patrol looking for schools with their lights on. (Some schools covered their windows with black tape.) China has been introducing restrictions on after-school tutoring at an increasing pace since 2018. Last month it barred tutoring firms from listing on the stockmarket, raising foreign capital or making a profit. The strictures have wiped tens of billions of dollars off the market value of China’s once-booming edtech sector.Will these measures work? It is almost impossible to stop families hiring private tutors to teach their children in their own homes. And if shadow education is successfully curtailed, the arms race can take different forms. Parents who cannot buy a better education directly can instead buy homes near better schools. A study by Xuejuan Su of the University of Alberta and Huayi Yu of Renmin University found that when the management of a public elementary school in Beijing is taken over by another better-regarded school, property prices nearby rise by an average of 7%.The arms race is notably less intense in parts of Europe. In Norway and Sweden parents show little demand for tutoring—the wealthy even less than others, according to Steve Entrich of the University of Potsdam. And overeducation is less common in Germany and other countries that sort children early into academic or vocational schools, with little mobility between the two, according to a study by Valentina Di Stasio of Utrecht University together with Thijs Bol and Herman Van de Werfhorst of the University of Amsterdam. Vocational schools are supposed to teach what employers want recruits to know. That may limit the scope for credential inflation. For better or worse, they also remove large numbers of students from the race for more academic laurels.Beruf als PolitikBoth China and South Korea have begun promoting vocational education. China’s latest five-year plan (which concludes in 2025) promises to explore an “apprenticeship system with Chinese characteristics” and to “vigorously cultivate talents with technical skills”, according to one translation. Some of the edtech firms squeezed out of after-school tutoring are exploring vocational education instead.Germany’s custom of placing children on different tracks at age ten or 11 also invites an interesting thought experiment. What if the gaokao (and similar tests) were held earlier in a pupil’s career? If these exams truly test the knowledge required for university, they must be held just before university starts. But if such tests mostly serve as filters, sifting better students from worse, they need not be held so late. An aptitude test at 16 years of age, say, will probably generate a similar ranking as one held two years later. The tests would remain stressful. But an earlier gaokao would save families a year or two of costly cramming, shortening “the obstacle course”, as Hirsch put it, without much changing the results. Such tests will always have high stakes. But they need not require such high effort. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Assume the positional” More

“WHAT DO YOU think we are, a bank?” scoffs an advertisement for Current, a neobank, on New York’s subway. It goes on to paint bank branches, poor customer service and overdraft fees as relics. The company is one of a hundred-odd “neobanks” vying to shake up retail banking in America, and which have exploded in size and number in the past year. On August 13th Chime, the country’s biggest neobank, raised a round of funding that valued it at $25bn—about the same as America’s 13th largest listed bank.As the advert suggests, most neobanks are not technically banks. They offer debit cards and online banking services through snazzy apps. But instead of obtaining a banking charter, which is onerous, costly and time-consuming, they often negotiate partnerships with small regional lenders, which hold and insure customers’ deposits. The startups pride themselves on their speed: they typically deposit paycheques a few days faster than large banks and, thanks to simpler identity checks, open accounts in minutes, even for customers with poor credit histories.Unlike conventional banks, which also earn money on overdraft and other fees, neobanks make most if not all of their money from interchange fees on debit-card transactions. Regulators allow small banks to charge at least double the interchange fees that large ones do; the benefit is passed on to the fintechs that latch on to them. In exchange, partner banks grow the pool of deposits against which they lend.The pandemic partly explains neobanks’ success. Lockdowns nudged customers to open online bank accounts from home. That neobanks cashed stimulus cheques swiftly probably also helped. According to Apptopia, a data provider, the number of monthly active users of neobank apps doubled between July 2019 and June 2021, while those of traditional banking apps shrank a little. Top neobanks boasted nearly 20m downloads in the first half of this year alone.The underlying drivers of the boom, though, are long-standing. Many customers have been poorly served by the financial system, if not shut out altogether. (The Federal Reserve estimates that one in five adults were either unbanked or underbanked in 2018.) The larger neobanks aspire to help those living paycheque to paycheque; others cater to specific underserved groups such as migrants. Social purpose aside, this makes business sense: such customers tend to save little and spend often, which suits the interchange-fee business, explains Max Flötotto of McKinsey, a consultancy. Jarad Fisher of Dave, another neobank, hopes that, once in the system, customers “graduate” to using more profitable services. To that end, his firm helps consumers find gig work.Optimists say incumbent banks will struggle to compete with neobanks, given the difficulty of modernising technology and customer service, and the risk of cannibalising their fee-based business. Banks’ shareholders may also be less keen on innovation than venture capitalists, says Scott Galloway of New York University.But the challengers face hurdles, too. A business based on interchange fees is only viable if costs are contained and volumes are high. All neobanks must bleed cash building trust with the hesitant underbanked and luring the already banked with freebies, but life is especially hard for the small ones that chase narrow customer segments. Chime aside, few firms turn a profit. Surveys suggest that a small fraction of bank customers regard the fintechs as their primary bank. Meanwhile, giants such as Google and Walmart are starting to dabble in digital finance.Many neobanks have realised that, if they are to achieve sustained profitability, they have to get into lending, says Jeff Tijssen of Bain, another consultancy. A few firms are launching credit cards and other lending products, venturing further into the terrain of conventional banks. Some might be swallowed up by the incumbents. Others might even, eventually, seek charters of their own. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “New tricks” More