Charles Schwab Investment Management

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

 

August 6, 2018


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  • Equities: The bull market regains its vigor

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    The bull market regained its vigor in July

    Solid U.S. economic growth and corporate profits provided a positive backdrop for equities in July. Wages and salaries grew at a quick pace in the second quarter, while consumer spending maintained its upward trajectory. All of this was on the heels of a Fed confident in the U.S. economy, which grew at an initially estimated 4.1% annualized pace in the second quarter.

    Warning signs argue for an industry rotation

    Equity investors may be shifting away from momentum stocks and into stocks of companies with a high potential for earnings growth and increased capital expenditures. Facebook and Netflix missed analysts’ earnings targets, leading to multi-day confidence concerns in some of the more prominent Technology companies. Fortunately, Apple’s favorable earnings announcement early last week helped to stem the slide in Technology stocks.

    The main risks for the equity market

    Escalating tensions between the U.S. and China continue to cause concerns on a global scale that could weigh on investor sentiment, reduce consumer confidence, and place downward pressure on growth prospects for the global economy. Trade war worries have featured prominently in this season’s earnings releases, many of which have warned about the potential effects that an all-out trade war might have on capital expenditures.

  • Fixed Income: Changing market climate

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Calm in the middle of the storm

    During the start of summer, Treasuries managed to find a Zen-like balance in the face of daily tariff and trade-war headlines. Yields on 10-year Treasuries traded in a 7 basis point range for about a month, something that hadn’t happened for more than 40 years. Is it possible for Treasuries to continue avoiding volatility despite mounting economic and political uncertainty?

    In the eye of the hurricane

    As we know, President Trump has been pushing for new trade agreements and threatening far-reaching tariffs, particularly with China. Economists agree that tariffs would be a drag on U.S. and global economic growth to at least some degree and might cause bond yields to decline in the process. While the direct impact on GDP itself might be modest, broader questions remain about how the trade uncertainty would affect business confidence and spending. All of this could potentially drive yields down.

    Treasuries ignore the storm, find smooth sailing

    So far, Treasuries have not seemed to reflect a high degree of concern with the potentially damaging effects of a trade war. It’s likely that investors recognize the relative risks and have evaluated them in the context of strong U.S. growth, full employment, stable inflation, and an economy enjoying the late stages of the current economic cycle.