Charles Schwab Investment Management

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

November 12, 2018


Download PDF
  • Equities: October’s pain to November’s gain

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    November recovery after a forgettable October

    The S&P 500® Index rallied roughly 7.5% from late October, benefiting in part from midterm election results. Gridlock has often been a positive for stocks amid expectations for political compromise. U.S. dollar weakness, stability among emerging markets, provocative valuations on international equities, and the potential for something other than a trade war between the U.S. and China paved the way for overseas stocks to rally as well.

    Corporate earnings—as good as it gets

    More than half of S&P 500 companies have reported third-quarter earnings, which rose approximately 20% for these firms year-over-year. More than 70% of these companies beat bottom-line expectations as revenue and earnings-per-share grew. However, dwindling stimulus, rising rates, higher labor and production costs, U.S. dollar strength, and potential trade disputes are fueling forecasts for an earnings slowdown. With volatility rising, sentiment shifting, and liquidity less than it once was, signs of the final phase of the current business cycle seem readily apparent.

    All eyes turn to the Fed

    Although the U.S. economy has started to decelerate, it has been growing above trend. A solid labor market and an 18-year high in consumer confidence should support continued economic growth. However, concerns about the Fed’s ability to keep the economy growing while balancing inflation risks have been rising of late.

  • Fixed Income: Ignored the election

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    The election is over . . . finally

    The midterm congressional elections dominated headlines for months as both parties jockeyed for control. Leading up to the elections, consensus expectations were for Republicans to retain a majority in the Senate and for Democrats to win sufficient seats to take control of the House. Unlike the presidential election in 2016, this time the pundits got it right, with the results confirming pre-election expectations.

    Gridlock: The de facto winner

    The day after the election, equity markets cheered the prospect of congressional gridlock. Elections introduce policy uncertainty, and the removal of this uncertainty—even when replaced with gridlock—can push stock markets higher. In fact, history teaches us that the optimism/relief can continue in the months and years following an election, as businesses and investors factor in a higher degree of difficulty to change existing policies.

    The unflappable interest rate market

    One might have expected volatility in the interest rate markets to match that of the equity markets. However, Treasury yields have largely ignored the near-sighted headline risk, instead reflecting the trajectory of the broad economy and Fed policy. Markets are projecting a rate hike in December and a few more in 2019. With inflation stable at around 2%, we expect Treasury yields to mirror this stability while continuing to look beyond the headlines.