Charles Schwab Investment Management

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

December 27, 2016

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  • Equities: 2017 Outlook

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Potentially faster U.S. growth in the forecast

    Renewed optimism for faster growth in 2017 has been driven by expectations for increased government spending, decreased regulation, and greater fiscal stimulus. In addition, positive inflation trends and a stable labor market support the case for additional Fed rate hikes next year, which could add momentum to the recent rotation out of global bonds and into stocks.

    A non-linear trajectory to record highs

    U.S. stocks could reach new highs in 2017 amid expectations that Trump's platform will make additional tax reductions and increased corporate spending possible, potentially leading to stronger corporate earnings growth. This combination may outweigh concerns about political uncertainty and Trump's protectionist stance. Should global bond yields continue to rise, the rotation from select Utilities and Consumer Staples stocks with overinflated valuations—and from high-dividend-paying stocks in general—into cyclical sectors could continue. Small-cap U.S. stocks, Financials, and Industrials, could benefit the most.

    Overseas: Developed markets may outperform

    Increased currency volatility seems likely next year, driven by rising inflation expectations, political uncertainty, and divergent central bank policies. Developed markets could outperform emerging markets if Europe and Japan continue to recover, while volatility among emerging markets seems likely to continue.

  • Fixed Income: 2017 Outlook

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Some things aren't likely to change

    The past several weeks were pretty crazy in terms of politics and markets. As we approach the New Year, it may seem like we're entering a whole new world, but we're really not.

    Yellen: Still a dove

    Today's landscape isn't all that different than it was in December 2015. Like then, the Fed just hiked rates and is forecasting several more to come. However, until actual inflation materializes, the Fed isn't likely to move quickly. Yellen has been dovish for years and we don't see that changing in 2017, even if Trump doesn't like it.

    Ties between Treasury yields and inflation

    For much of 2016,10-year Treasury yields traded between 1.5% and 2.0%. Next year is likely to see yields in the 2% to 3% range. Given comparatively lower yields in Europe and Japan, U.S. bonds are attractive, as long as domestic inflation remains in check. Despite everything we’ve heard from Yellen and Trump of late, there just hasn’t been a meaningful uptick in inflation.

    Be wary of yield temptations and credit risk

    Next year could prompt investors to reach for higher yields. Beware! High-yield and emerging-market bonds may seem tempting, but the risk/reward tradeoff is currently skewed. Many factors could harm these securities in 2017, so we suggest a wary approach to higher yields and a focus on the long-term, instead.