Charles Schwab Investment Management

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

February 5, 2018


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  • Equities: So goes January, so goes the year

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    An impressive statistical fact

    Since 1950, U.S. stocks have generated positive returns roughly 88% of the time when January returns have been positive, according to the Stock Trader’s Almanac. Although this is just an impressive statistic and not a guarantee of future performance, it adds to the optimistic outlook for stocks this year, which is founded upon a synchronized global economic recovery, strong earnings, and tax cuts that have encouraged “animal spirits.”

    Global bond rout isn’t scaring equity investors

    Global bond yields have risen amid rising inflation expectations, a hawkish recent statement by the Fed, and increased evidence of solid European manufacturing activity that supports expectations for economic recovery in the euro zone. Volatility has increased some as 10-year Treasury yields have reached three-year highs but remains near multi-year lows, overall.

    Bond proxy sectors continue to feel the pain

    REITs, Telecommunications, and Utilities have been feeling the indirect negative effects of higher bond yields. Since 2008, positive relative returns on these sectors have been highly correlated with Treasury yields amid heightened demand for dividends, irrespective of valuations or fundamentals. Headwinds for these yield-sensitive sectors could continue, while Financials, Health Care, Industrials, and Technology seem well positioned.

  • Fixed Income: The changing of the guard

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    The Fed’s careful approach could continue

    Janet Yellen’s four-year term concluded last week. She leaves the Fed’s reins in the hands of her successor, Jerome Powell. He will likely continue along the same pathway that Yellen followed, moving short-term rates higher, but only at a gradual pace. Though the Fed hiked rates five times while Janet was chair, she generally favored a dovish approach, and so too might Powell.

    Stretching toward 3.0%

    Janet leaves the Fed with 10-year Treasury yields inching ever closer to 3.0%. In fact, yields are at the top end of the range for Yellen’s recently ended four-year term. Inflation hasn’t come roaring back as many analysts had feared; however, a few indicators point to the possibility for inflation to rise. Specifically, wages, employment, and growth might fuel a faster inflation rate, but so far, these influences haven’t moved the dial very much.

    Volatility is back en vogue

    While 2017 was a one-way ride for U.S. stocks, and rates were generally range-bound, 2018 has already provided bouts of old-fashioned volatility. Over the past week or so, stocks finished in the red on a couple of days—something that investors haven’t really experienced for some time. This volatility points to the likelihood that the Fed will continue to move cautiously. After all, if anything could derail the trend toward higher rates, it would be a downturn in stocks.