Charles Schwab Investment Management

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

 

July 23, 2018


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  • Equities: Corrections and inflection points

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    No real winners in a trade war

    A trade war represents the biggest threat to global growth, and this possibility has weighed on emerging markets in particular. The International Monetary Fund believes a trade war could shave off 0.5% from growth forecasts within two years of its onset.

    Global growth remains healthy, for now

    Led by the U.S., global growth remains on a positive trajectory for now in spite of the trade-related discussions. GDP in the U.S. is expected to have surpassed 3.0% in the second quarter, propelled by wage growth and strong personal income and spending gains.

    Earnings season looks promising

    U.S. companies are expected to report solid profits in the second quarter, benefiting from the dollar’s decline and corporate tax rate reductions. Technology and e-commerce seem set to deliver solid earnings growth, while Financials, Energy, and Materials have benefited from higher interest rates and surging energy prices.

    Market corrections and inflection points

    Over the past 12 months, U.S. large-cap growth stocks have outperformed value stocks by more than 15%, an outcome that is greater than two standard deviations from the mean. The late 1990s was the last time that such a disparity occurred. Market inflections and corrections are difficult to gauge, but we believe that value looks very compelling right now compared with growth.

  • Fixed Income: Ready, set, hike

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Four rate hikes look likely this year

    Not since 2006 has the Fed hiked rates four times in a single year. At the beginning of 2018, markets were pricing in two hikes with a slight possibility of three. As we enter the second half of this year, Fed Chairman Powell has repeatedly communicated his confidence in the strength of the U.S. economy and satisfaction with the trajectory of inflation. Markets have recently responded by pricing in the near certainty of a third hike in September, as well as a quite possible fourth hike in December.

    Yield curve “conundrum” revisited

    A dozen years ago, then Fed Chairman Ben Bernanke was battling an overheating U.S. economy by raising rates while scratching his head about the flat yield curve “conundrum.” A parallel can certainly be drawn with today’s economy, which is experiencing a similarly paradoxical flattening yield curve in spite of underlying growth and inflation metrics that appear to be strong. However, caution would be advised before transferring too many forward-looking conclusions based upon historical market behavior.

    A new playbook

    It’s hard to make the case that we are on the verge of another financial crisis like 2008. So while Fed Chair Powell may sympathize with Bernanke’s yield-curve conundrum, Powell seems to have time before needing to shift away from the gradual pace of hikes that has defined Fed policy the past three years.