Charles Schwab Investment Management

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

February 6, 2017

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  • Equities: The reflation trade

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Stocks continue trending higher

    Fueled by favorable unemployment numbers and positive corporate earnings, U.S. stocks have continued to trend higher. Expectations for corporate tax reform and infrastructure spending continue to fuel “animal spirits” and investor confidence, driving up stocks. At the same time, the probability of disappointment seems to have increased with every point added by the Dow.

    Currency considerations and central banks

    The U.S. dollar has been weaker this year, reflecting uncertainty regarding new trade policies and a clouded political outlook. In turn, the weaker U.S. dollar has provided a tailwind for many emerging markets and commodities. The role of the central banks has been less dominant so far in 2017, but the rising level of commitment to move toward normalized interest rates could generate currency volatility later this year.

    On the horizon

    Looking ahead, we will continue to monitor these and other developments closely to see if U.S. economic data, inflation, corporate profits, and economic improvement internationally evolve to meet market expectations. For now, we believe that the Financials, Energy, and Industrials sectors are better positioned to benefit from this environment than the retail industry or the Telecommunications and Utilities sectors, which we believe could underperform if global bond yields continue to rise.

  • Fixed Income: Donald “Trumps” the Fed

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Wasn’t there a Fed meeting recently?

    Yes, but hardly anyone seemed to notice.

    Does the Fed matter anymore?

    In the short run, not so much. The Fed met last week and hardly anyone's taking about it. Yet again last week, Trump dominated the headlines. True, the Fed wasn’t expected to change its rate policy. But usually, Fed statements convey insights regarding future rate policy—and often generate market volatility. But currently, Janet just can't seem to compete with Donald.

    How about the jobs report?

    Typically, the monthly jobs report is the single most important piece of economic data we can get. And when the number is released, stocks, bonds, and currencies usually start moving. Last Friday, the Labor Department announced that 227,000 new jobs had been created. Not bad. But in the current environment, economic data can't seem to compete with Donald.

    Is everything Trump says moving the markets?

    Sure seems like it. Unquestionably, what Trump does, says, and tweets seems to affect the financial markets. When he's talking about reducing taxes and regulation, or talking about increasing fiscal spending, equities and bond yields tend to rise. When he's talking immigration and trade, it's often the opposite result. So the only thing that seems to compete with Donald is … Donald.