Charles Schwab Investment Management

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

December 12, 2016


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  • Equities: Continuing to gain ground

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    U.S. Stock indexes at all-time highs

    Major U.S. stock indexes have recently reached new record highs as bond yields have risen around the world. Optimism regarding the potential for fiscal stimulus, deregulation, and government spending by the Trump Administration appears to have been driving this dynamic, overshadowing political uncertainty in Washington and concern about the potential fallout from Trump’s protectionist platform. The Financials sector has been leading the post-election charge as federal funds futures have priced in a quarter-point interest rate increase by the Fed this week.

    Small-cap resurgence

    Credit availability, fiscal spending, and attractive valuations appear to have been driving the performance of small-cap U.S. stocks, many of which underperformed in early 2016. The Russell 2000 Index has returned more than 20% so far in 2016, with the majority of this gain having occurred over the past month.

    European Central Bank policy adjustments

    Mario Draghi announced the reduction of the European Central Bank’s (ECB’s) bond-buying program, while extending the bank’s quantitative easing policies until December 2017. Following other central banks, the ECB has adopted the flexibility to buy bonds with maturities as short as one year as they closely monitor the shape of the yield curve. European stocks have recently been rallying, even as the euro has depreciated versus the U.S. dollar.

  • Fixed Income: Rate hike coming!

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Déjà vu all over again

    Back in 2015, the Fed waited until December to raise rates for the first time in nearly a decade, contrary to early year expectations. We may see a similar circumstance this week, as a rate hike on Wednesday would be the only one of 2016. Remember, when we started this year, the Fed was forecasting four rate hikes for 2016. However, the market generally priced in two rate hikes instead, while only one occurred. At present, two rate hikes are expected for 2017, so it’ll be interesting to see what the Fed has to say.

    Rising rates

    The yield on the 10-year Treasury is about 50 basis points higher than it was on election night. It seems that the world has completely changed. With Trump’s victory, markets now seem to expect a reduction in tax rates, increased fiscal spending, and a corresponding increase in the U.S. budget deficit, along with higher inflation. A lot can go wrong if Trump doesn’t fully succeed.

    The Trump effect in corporate bonds

    Equity markets have been on fire since Trump’s victory, while gains for corporate bonds have been comparatively muted. With the yield difference between high-quality and high-yield bonds historically low, yield hungry investors would be wise to focus on the long-term. Also note that not all corporates behave the same: Banking and Energy have benefitted from Trump tailwinds, while select sovereign bond issuers have been facing headwinds.