Charles Schwab Investment Management

Biweekly insights on the latest global investment news regarding equities and fixed income from our leadership team.

September 17, 2018


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  • Equities: Emerging market bears awaken

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Hibernation ends for emerging market bears

    Emerging market stocks recently entered bear market territory. The near-term outlook is poor for these equities amid rising U.S. interest rates and elevated global trade tensions that support the U.S. dollar, which reached a 15-year high early in 2018. This represents a major hurdle for many emerging market economies. A potential NAFTA deal and European Union negotiations make it even more difficult for the U.S. to reach an accord with China.

    Rate hikes enabled by solid U.S. conditions

    Recent U.S. Census Bureau data showed that U.S. household income rose in 2017, driven by solid labor market conditions. When combined with increased consumer spending, the outlook for U.S. economic growth is decidedly upbeat. This backdrop, combined with moderate inflation, should give the Fed plenty of room to continue raising short-term interest rates gradually.

    Stumbling blocks and sector opportunities

    Momentum stocks have trended lower in September as investors re-examine valuations in light of midterm elections, elevated Tech stock prices, emerging market volatility, and ongoing trade disputes. Increased capital expenditures, forecasts for more than $800 billion in stock buybacks, and tailwinds from fiscal stimulus are supporting U.S. stocks. In this environment, we like Financials and Health Care, as well as consumer cyclical stocks, giving us a potential opportunity to rebalance holdings of select Tech stocks.

  • Fixed Income: Goldilocks inflation backdrop

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    A happy Fed, a happy life

    The Fed has made it clear that they are comfortable with inflation in a “symmetrical range” around 2%. Common measures of inflation such as the Consumer Price Index and Personal Consumption Expenditures (the Fed’s preferred measure) have been ticking higher the past few years. Despite this recent upward trajectory, inflation is well within the Fed’s target. They like this!

    Wage growth is looking good

    With the U.S. economy at or near full employment, history suggests that wage pressures should be building. In August, average hourly earnings grew 2.9%, the fastest monthly pace since the financial crisis, but still below what economists would expect, given the low unemployment rate and strong job growth. Certainly no signs of overheating in the wage numbers yet.

    The markets like it too

    The Fed continues to assure markets that they are comfortable with the current pace of inflation, since they believe it will stabilize within their long-term target range. And most importantly, the markets seem to believe the Fed. Inflation expectations, as reflected in inflation-indexed securities, have been well anchored around 2%, indicating that investors are confident that the Fed will be able to keep inflation in check with the current pace of gradual interest rate hikes. So for now, all signs point to an inflation outlook that’s not too hot, not too cold—it’s just right!