Charles Schwab Investment Management

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

January 8, 2018


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  • Equities: The party continues

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Robust synchronized global economic recovery

    Global equity markets enter 2018 amid momentum fueled by strong economic fundamentals. Forward-looking economic indicators continue to improve across all regions, supporting expectations for corporate earnings growth. Accommodating central bank policies and low but growing inflation are also positives, while keeping bond yields low globally. Rising commodities prices and expected U.S. dollar depreciation continue to benefit international markets and provide strong tailwinds for emerging markets.

    Record performances by equity indexes

    The S&P 500® Index generated a 21.8% total return in 2017, posting a record 12 consecutive months of positive results, with Technology contributing more than 40%. Recent tax reform has helped stocks, with the market pricing in increased corporate earnings resulting from corporate tax rate reductions, helping the Dow Jones Industrial Average push past 25,000. However, the actual economic benefits of the tax reform bill are still uncertain.

    A closer look at U.S. sector opportunities

    This low volatility and economic backdrop supports cyclical and growth sectors in the U.S. this year. Financials, Health Care, Materials, and Consumer Discretionary seem better positioned for this unfolding economic environment than retail stocks and traditional bond proxy sectors like Consumer Staples and Utilities.

  • Fixed Income: 3 reasons to like bonds in 2018

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Absence of inflation

    As we start 2018, pundits seem excited about the prospects for inflation to finally begin rising. But not so fast! Inflation still hasn’t materialized, with consumer prices, producer prices, and wages showing only slight increases. There’s no reason to think this year will be much different from the past several years in this regard. Moreover, if inflation remains low, so should bond yields, which would be welcome news for fixed-income investors.

    A cautious Fed

    The Fed has forecasted three rate hikes for 2018, but don’t bet on it. As soon as the market senses that the Fed will move cautiously, as they usually do, that should prompt bond buying. The Fed has been erring on the side of keeping rates too low rather than too high, and 2018 will likely be more of the same.

    Equity market normalization

    The equity market was on fire in 2017, which led to significant investor optimism, higher stock prices ... and round and round we went. This, combined with mind-numbingly low volatility, has lulled investors into complacency. It’s hard to imagine that stocks will continue their one-way ride. And when an inevitable bump in the road occurs, investors might find bonds particularly attractive: not because of compelling yields, but because bonds’ lower risk levels relative to stocks will remind investors why bonds should always be a key portfolio component in any environment.