Charles Schwab Investment Management

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

April 16, 2018


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  • Equities: Volatility shifts the playing field

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Worldwide equity market volatility

    Investors remain cautious as they adjust to sharply elevated levels of volatility compared with recent years. Uncertainty about the potential implications of trade disruptions between the U.S. and China and escalating tensions between Russia and the U.S. over Syria seem to be driving daily market swings. In addition, the potential for retaliatory actions by other countries if a trade war breaks out could affect the Fed’s plans regarding interest rates.

    Recent data supports the case for higher rates

    The latest set of economic indicators showed signs that inflation is on track to reach the Fed’s 2% target in the next few years. The outlook for U.S. economic growth remains positive on the heels of increased government spending, positive consumer confidence, and the potential benefits from the recent fiscal stimulus. This backdrop supports the Fed’s current forecast for two more hikes in the federal funds rate this year and for three more in 2019.

    Q1 earnings could lend support and stability

    As we enter the reporting season for first-quarter earnings, profit forecasts for S&P 500® Index companies are generally optimistic. The benefits from the reduction of corporate tax rates to 21% and the weaker U.S. dollar should solidly support profit growth. In this environment, Technology, Financials, Energy, and Materials seem well positioned to benefit from tax revisions, buybacks, increased capital expenditures, and the rise in commodity prices.

  • Fixed Income: Weathering the tech storm

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Tech in the news

    Through last week, the S&P 500® Index has had three times as many days with greater than 1% moves than in 2017. Along with the frequent tariff-related headlines, tech-focused stocks have been a catalyst for recent market volatility. From Facebook’s privacy concerns to President Trump’s potential Amazon.com conflict, the sector that drove markets higher in recent years has been one of the worst performing sectors lately.

    Bonds are less concerned

    In the face of the equity market’s recent bout of volatility, corporate bonds from major tech companies have exhibited a comparatively muted response. Investors often demand higher yields on the debt of companies that are experiencing disruptive events. However, tech-focused corporate bonds have actually outperformed most other sectors of the investment-grade corporate bond market over roughly the past month. This suggests that investors still prefer tech-focused debt.

    Who’s got the right outlook on tech

    Stock and bond investors have a different take on technology company risks. Stock investors seem nervous about historically high valuations, while bond investors are sleeping comparatively well at night, comforted by the high credit quality and high cash flow generation of many top tech firms. With different objectives, both equity and fixed income investors may be on the mark.