Charles Schwab Investment Management
Biweekly insights on the latest global investment news regarding equities and fixed income from our leadership team.
Equities: Trading on expectations
Omar Aguilar, Ph.D.
Chief Investment Officer,
Equities and Multi-Asset Strategies
Confidence and spending incongruence
Consumer confidence and sentiment are at or near their highest levels in more than a decade, suggesting, in part, expectations that President Trump will enact beneficial tax reforms for businesses and individuals. These reforms are expected to help fuel increased capital spending, a faster pace of consumption by consumers, and faster U.S. economic growth. However, fiscal stimulus takes time, and it is impossible to know precisely what policies the Trump Administration will successfully enact or to pre-quantify any resulting stimulus with much accuracy. For the moment, higher consumer confidence has yet to translate into increased spending, as reflected by recent holiday sales results.
Low volatility and low risk are not synonymous
Uncertainty remains a strong undercurrent in the financial markets as the Trump Administration officially takes control of the White House. Equity market volatility has waned amid the post-election equity market rally. However, global risks seem to be on the rise, including the potential for currency wars, elevated commodity prices, and political uncertainty in Europe, which could collectively disrupt U.S. economic growth. While we expect higher market volatility in the short run, we still think that the Financials, Energy, and Technology sectors seem better positioned than defensive sectors like Consumer Staples and Health Care, or retail industries over a medium-term horizon.
Fixed Income: All about Trump (or so it seems)
Brett Wander, CFA
Chief Investment Officer,
All eyes on Trump
As the Oval Office changes hands, the markets are focused on one thing: Donald Trump. His words, actions, and tweets seem to be driving interest rates and equity markets to a degree that is dominating traditional factors like the Fed, economic data, and corporate earnings. But we expect that these traditional factors will return to the forefront.
The Fed—still cautious
Janet Yellen continues to speak of expected rate hikes this year. But at the same time, she has also conveyed her belief that inflation is well contained with very little risk of the U.S. economy overheating. We translate that message as, “Don’t count on an aggressive Fed,” which is still as data dependent as ever.
Inflation—still low, still matters
In the final weeks of 2016, rates spiked in response to Trump’s election victory. But over the past few weeks, rates have modulated. In the long-run, nothing will matter more for interest rates than inflation. And we still haven’t seen much of it.
Equities and interest rates
Equities and interest rates seem like they’ve been moving in the same direction: upwards when Trump seemed focused on growth, tax reductions, and fiscal stimulus, and downwards when his rhetoric emphasized protectionism and isolationism.