Charles Schwab Investment Management

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

February 20, 2018


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  • Equities: A fundamentally sound outlook

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Bond rout ignites equity market volatility

    After more than 500 days without a 5% correction, global equity markets weathered sharply increased volatility recently. Equity investors were concerned that the Fed would quicken its forecasted pace of rate hikes on the heels of heightened inflation expectations, which drove U.S. Treasury yields to four-year highs.

    Solid fundamentals amid unsettling pullbacks

    Long-term market drivers remain strong in spite of the recent pullbacks. The S&P 500® Index fell from its early February peak, with the CBOE Volatility Index®, or VIX®, rising sharply. This triggered losses in products betting against increased volatility, which created additional short-term selling pressure. While we expect volatility to continue, the underlying market fundamentals seem solid and the outlook for equities remains positive.

    Major stock market trends haven’t changed

    Even though bond yields have risen globally, the synchronized global economic recovery, positive corporate profits, fiscal stimulus, and accommodating central banks continue to support the outlook for equities. Corporate earnings remain solid, with nearly 80% of the S&P 500 companies that have reported fourth-quarter 2017 earnings exceeding expectations. In this environment, Technology, Financials, and Health Care should continue to lead, while bond proxies like Telecommunications, Utilities, and consumer-facing sectors may face headwinds.

  • Fixed Income: Not your grandfather’s crash

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    No fundamental catalyst

    Over the past few weeks, we’ve seen the markets move in a way that seems almost incomprehensible. The Dow Jones Industrial Average has swung well over 1,000 points in a given day—several times. What’s most surprising has been the lack of a clear, precipitating event or cause. Everything has been pretty calm on the geopolitical front, earnings continue to look strong, and even Trump’s tweets are getting old. We can look as hard as we want for fundamental reasons—but sometimes it’s entirely technical.

    Why now

    The equity market volatility of the past several weeks has shaken investors’ sense of relative stability. This volatility is particularly striking compared with how quiet things have been over the past several years. Ironically, it’s this very lack of volatility that has contributed to the sudden market shifts of late. Many traders have been unwinding previously established bets for calm markets, and this seems to be creating a snowball effect.

    Look to the bond market for clues

    The recent rise in rates has been cited as the trigger for the equity market’s slide. However, yields on Treasuries initially fell as the equity markets plunged, then they returned to recent highs as market volatility continued. It’s also quite noteworthy that credit markets have been relatively benign. This further underscores that the selloff was technical rather than fundamental in nature.