Charles Schwab Investment Management

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

April 02, 2018


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  • Equities:
    A tumultuous first quarter

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Heightened volatility in perspective

    Global equity markets finished the tumultuous first quarter amid heightened volatility that is far more in keeping with longer-term averages than the comparative doldrums experienced in 2016 and 2017. After record-setting performances in January and February, the S&P 500® Index and many international indexes lost ground in March to finish the first quarter in negative territory.

    Climbing a wall of worry

    Uncertainty surrounding the economic impact of a potential trade war between the U.S. and China helped to fuel a spike in volatility. Investors also seem worried about the recent challenges faced by social media companies, including potentially elevated regulation regarding the disclosure and privacy of personal data.

    A stable and growing global economy

    The global economy continues to grow despite short-term market fluctuations. The positive trajectory is well supported by underlying market fundamentals across the board. This is evidenced by the very muted widening of credit spreads throughout the recent volatile period. Overall, investor sentiment may no longer be as euphoric as it was in 2017, but it remains positive. We continue to believe that pro-cyclical sectors like Technology, Health Care, and Financials are better positioned for the current environment than defensive sectors like REITs, Utilities, and Consumer Staples.

  • Fixed Income: Short rates rose, long rates fell

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    The Fed met expectations

    As expected, the Fed raised rates in late March. And as has often been the case in recent years, longer-term Treasury yields fell in response. The Fed of course only controls short-term rates. With the economy growing at perhaps just the right pace, Fed chair Jerome Powell mentioned in his post-session press conference that two or three more rates hikes may be on the way this year.

    3.0% Treasury yields—not so fast

    Longer-term rates are driven by inflation expectations, which have fallen slightly in recent weeks, pulling yields on 10-year Treasuries back from the brink of 3.0%. The Fed acknowledged that they are becoming more confident that inflation will reach and then stabilize around their 2.0% target. With inflation and economic indicators only moderately improving, Treasury yields seem likely to remain range-bound after finishing last week around 2.75%.

    Recent economic highlights

    Employment remains a pillar of strength for the U.S. economy. At 4.1%, the unemployment rate is at a two-decade low and employers are hiring an average of 200,000 workers each month. Tight labor markets usually lead to solid wage growth, although this hasn’t yet materialized on a sustained basis. The lack of persistent wage pressure is keeping longer-term rates low. For now, few signs point to an overheating economy that would warrant a push toward meaningfully higher Treasury yields.