Charles Schwab Investment Management

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

July 9, 2018


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  • Equities: Evaluating risks and opportunities

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Trade talks ignited volatility

    Ongoing trade-war concerns set the stage for the final trading days of the second quarter, igniting volatility among currencies and stock markets around the world. Central among these worries were the potential longer-term effects that enacted restrictions could have on U.S. manufacturing activity and the Industrials sector. However, these concerns may not be overly realistic, given that manufacturing represents a modest 12% of U.S. GDP.

    Central bankers closely monitor global growth

    The Fed has clearly communicated that trade policy changes could affect their economic outlook and interest rate policies, as signs of wage growth and controlled inflation have been helping the U.S. lead the global economic charge. Overseas, the European Central Bank announced that any increase in short-term interest rates would be unlikely until at least the summer of 2019. This reflects their desire to support the euro zone’s continued recovery amid the recent-quarter string of softer manufacturing numbers, ongoing political concerns, and strong local currency.

    Consider lightening up on cyclicals

    Growth has significantly outperformed value this year, pushing relative valuation spreads to extremes. Although growth may continue to benefit from the final phase of this economic cycle, advocating that your clients diversify into sectors like Financials and Energy may help to enhance their longer-term results.

  • Fixed Income: A September rate hike rarity

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    A rare rate hike, indeed

    Since the Fed embarked on their current rate-hike journey nearly three years ago, a September rate hike hasn’t happened. (In fact, the last time was way back in 2005.) In the fall of 2015, the Fed was patient as credit markets were nervous about collapsing oil prices, and in 2016, market volatility resulting from the Brexit vote seemed to convince the Fed to sit tight. In 2017, they hiked three times, but skipped September. Now, after already having hiked rates twice in 2018, a September increase looks quite possible.

    This September could be different

    The U.S. economy is humming along with consensus expectations for second-quarter GDP between 3% to 4%, a range that has been elusive since the financial crisis. Based on the Fed’s “tea leaves” (dot plot), more than half of the committee believes two more hikes are warranted in 2018, with one likely in September.

    The market hasn’t yet gone all in

    Despite encouraging economic and Fed signals, the market has been hesitant about fully pricing in a September rate hike amid trade worries. With the risks of upside inflation seemingly small, the Fed has more flexibility. The markets were recently pricing in about an 80% chance of a rate hike in September, based on our analysis. So although the Fed may hike rates in two months, it’s important to remember that they have a history of being cautious when conditions warrant . . . especially in September.