Charles Schwab Investment Management

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

August 20, 2018


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  • Equities: Facing a wall of worry

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Emerging markets face a wall of worry

    The crisis in Turkey, slower growth in China, falling commodity prices, trade tensions, and rising U.S. interest rates are some of the reasons investors are uneasy about emerging markets. Concerns that a contagion could spread have sparked a selloff in commodities and pushed emerging markets into bear market territory this year. However, major emerging markets are more diversified than has historically been the case, making them better prepared to withstand external shocks. In addition, Turkey represents only a small fraction of overall emerging market GDP.

    Undeterred by an ever-rising tide of risks

    Despite the seemingly ever-rising tide of geopolitical and trade risks, U.S. equity markets remain generally afloat with a balance of positive year-to-date returns. This resilience has been fueled by solid domestic economic growth, selectively dazzling corporate earnings, and increased stock buybacks that support valuations.

    Lower taxes led to solid quarterly earnings

    With more than 92% of companies having reported, U.S. earnings rose nearly 25% on a year-over-year basis during the second quarter, with robust profit margins and healthy top-line growth benefiting from a lower corporate tax rate. This solid performance and cash repatriation drove up stock buyback programs. In fact, so far in 2018, corporate buybacks have risen more than 80%, with over $750 billion in total, creating strong support for equities.

  • Fixed Income: Turkey gets plucked

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Turkey gets roasted by global investors

    The Trump Administration has implemented sanctions and tariffs on Turkey as a negotiating tactic, thrusting Turkey into a roaring global fire, with the country’s stocks, bonds, and currency collapsing. Neither President Trump nor President Erdogan of Turkey have been willing to compromise, despite the dramatic market effects and potential contagion on emerging markets in general. Turkey’s lira has dropped more than 30% over about the past month versus the U.S. dollar, and the yield on Turkey’s benchmark 10-year bond has risen substantially to roughly 22%.

    Don’t wait for the smoke, be proactive

    Turkey is likely to dominate headlines for some time, but investors would be wise to consider the broader ramifications of investing in potentially higher-yielding strategies. After years of low interest rates and historically low volatility, some investors seem complacent about risk as they have reached for yield in more speculative areas of the markets. Developments in Turkey should remind investors that volatility can strike when least expected.

    Read the recipe book ahead of time

    Over the past few weeks, higher-quality stocks and bonds have performed quite well. The benefits of a diversified, higher-quality, liquid portfolio of core asset classes has historically been one of the better ways to navigate a wide range of market environments, particularly when the environment turns volatile.