Charles Schwab Investment Management
Biweekly insights on the latest global investment news regarding equities and fixed income from our leadership team.
Equities: A widely anticipated result
Omar Aguilar, Ph.D.
Chief Investment Officer,
Equities and Multi-Asset Strategies
Fed decision was fully priced into the markets
Global equity markets had fully priced in the Fed’s quarter-point rate hike, so the decision came as no surprise. Of far greater interest was the rationale behind the decision, as well as Fed forecasts regarding future policy adjustments. Overall, equity markets took the news in stride, reflecting apparent comfort with the gradual but accommodative approach that the Fed presented.
Economic stability and inflation on track
The Fed seemed comfortable with the relative health of the U.S. economy and pace of economic growth, both of which have benefited from improving labor market conditions and a trend toward a healthier rate of inflation. In fact, unlike forecasts at the time of other recent rate hikes, expectations for inflation in 2018 and 2019 are now within the Fed’s target of approximately 2.0%.
Market stability will remain an important factor
Fed Chair Janet Yellen is naturally dovish, and has been intentionally cautious to adjust Fed policies as transparently as possible. A question mark remains, however, as to how the Fed’s latest decisions and rhetoric will affect the U.S. dollar. If the dollar strengthens, headwinds could arise for the economy, and for multi-national corporations based in the U.S. Political risks in Europe could also weaken the euro, complicating any strong dollar effects. Financials, Technology, Energy, and Materials stocks seem well positioned to benefit from such an environment.
Fixed Income: Multiple rate hikes in 2017?!
Brett Wander, CFA
Chief Investment Officer,
More than one rate hike this year?
The Fed raised rates on Wednesday as expected, confirming that 2017 could be the first year in more than a decade in which multiple rate hikes take place—but two more could be the limit.
What’s Yellen telling us?
The real story around the rate hike involved the sudden shift in market expectations a few weeks ago. Up to that point, a March rate hike looked doubtful. Then, over the past few weeks, the Fed started speaking quite directly about the likelihood of a rate hike. We haven’t seen such a dramatic shift in expectations in recent memory, making two more rate hikes in 2017 very possible.
What’s the bond market telling us?
Last December, when the Fed previously raised rates, 10-year Treasury yields were around 2.50%, near where they are today. So while the Fed has raised rates 50 basis points in only 3 months, U.S. government bond yields haven’t moved anywhere near as much as you might expect. Why? It all comes down to inflation expectations, which continue to remain relatively low.
What’s the stock market telling us?
Since President Trump was elected, stocks have surged. This gives Yellen enormous flexibility to change policy as the Fed sees fit. She’s long seemed concerned about stocks falling after a rate hike, so she’s probably losing less sleep this year.