Charles Schwab Investment Management

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


April 30, 2018


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  • Equities: Focused on fundamentals

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Earnings season takes center stage

    With the first-quarter earnings season in full swing, worries about a possible trade war have taken a back seat to fundamentals, at least for now. Helped by fiscal stimulus, a weaker U.S. dollar, and increased consumer spending, Technology and Consumer Discretionary firms have been posting solid earnings growth. Meanwhile, financial firms have benefited from higher volatility, increased trading, and tighter monetary policies. However, investor skepticism regarding corporate profit growth amid the rising-rate environment has muted the market’s overall response.

    A return to 3% on Treasuries

    Partially countering the good news about the economy and equity fundamentals has been a rise in longer-term Treasury yields. Specifically, the 10-year Treasury is now above 3.00%, with new yield levels indicating that inflation expectations have risen over the near-term, even as GDP forecasts have changed very little.

    Europe hits a soft patch

    After four quarters of above-trend growth, Europe’s economy slowed during the first three months of this year. The European Central Bank left rates unchanged at a recent policy meeting, while confirming a cautious but positive outlook for the region. Given U.S. dollar weakness, attractive relative valuations, and accommodative central bank policies, we still believe that international markets are well positioned for the rest of this year.

  • Fixed Income: The 3% threshold

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Treasury yields at 3%

    Yields on 10-year Treasuries recently crossed the headline-grabbing 3.00% threshold for the first time since early 2014. We’ve subsequently been asked whether breaching this psychological barrier is a portent of higher yields to come. The last time that yields on 10-year Treasuries rose above 3.00%, they fell shortly thereafter to finish 2014 at around 2.15%. This time around, history seems unlikely to repeat itself.

    Inflation expectations rise

    What’s been driving yields higher? One approach to solving this riddle is to look at the yield gap between nominal Treasuries and Treasury Inflation-Protected Securities (TIPS), which trade at “real” yields. Over the past few weeks, the yield gap—or breakeven rate—between 10-year TIPS and nominal Treasuries has risen to multi-year highs, hitting around 2.20%. That’s above recent core inflation readings and tells us that inflation is expected to rise.

    Take a look at commodities

    Why the expectations for faster inflation? One factor is the recent rise in oil prices, reflecting OPEC’s decision to extend production restrictions through 2018. As a result, oil is near its highest price since 2014, and might go even higher still. In addition, other commodities like industrial metals have risen due to tariff-related concerns. How these expectations evolve from here may be key to whether 10-year Treasury yields rise meaningfully beyond 3.00%.