Charles Schwab Investment Management

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

December 26, 2017

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  • Equities: 2018 Outlook

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Another healthy year ahead for global equities

    After an impressive 2017, the second-longest bull market ever still has room to run, with synchronized global growth providing a solid foundation for equities. The lack of inflation globally supports the Fed’s plans to raise rates gradually, while other central banks seem likely to maintain accommodative policies for most of 2018.

    Tax bill and sentiment support momentum

    The U.S. economy could grow above trend, fueled by business and consumer spending, low unemployment, and stable housing. Higher productivity gains and wage growth acceleration will be key inflation indicators. A new tax bill and government spending on infrastructure should support capital expenditures, although the effects of new fiscal policies on growth remain to be seen. As we enter the last phase of this cycle, we expect more mergers and acquisitions, increased volatility, wider credit spreads, rising rates, a softer U.S. dollar, and a flatter yield curve. Financials, Health Care, Materials, and Industrials seem better positioned for 2018 than Consumer Staples, Telecommunications, and Utilities.

    International equities are better positioned

    The economic recovery among developed markets should fuel earnings growth in cyclicals amid easier credit conditions and increased market liquidity for investors. U.S. dollar depreciation should provide a tailwind for growing emerging markets that have enjoyed financial and political stability in recent years.

  • Fixed Income: 2018 Outlook

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Janet Yellen 2.0

    The names have changed, but the game is the same: Jerome Powell will be the new Fed chair and likely do exactly what Janet Yellen has been doing for years—move rates up very cautiously. The last thing Powell wants is to spook the stock market by moving too quickly. And, with the continued lack of inflation, he’ll face more pressure to keep rates low than to normalize too fast. Look for two or three rate hikes in 2018, but don’t expect four.

    An inverted yield curve—but don’t panic

    The yield spread between 2– and 10-year Treasuries is about 0.50%, less than half of where we started 2017. Expect more flattening in 2018, maybe even yield curve inversion. In the old days, an inverted curve foreshadowed slowing growth and a possible recession. But in the current environment, this model is obsolete. Inflation is tame, so longer-term yields don’t have to rise. Meanwhile, the Fed could easily raise rates 0.50% to 0.75%, making a flat or slightly inverted yield curve the new normal.

    Equities seem set for a less impressive 2018

    Another 20%-plus return for U.S. stocks is highly improbable in 2018. Tax reform is already priced in and another significant injection of market euphoria seems unlikely. Instead, we’ll likely see continued turbulence on the Trump-front, and a great deal of uncertainty in the geopolitical realm (North Korea, Brexit, etc.). This could be bad for stocks but could be good for bonds.