Charles Schwab Investment Management

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

June 12, 2017

Download PDF
  • Equities: Ongoing overseas improvements

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Europe’s prospects continued to improve

    The European Central Bank (ECB) made no interest rate policy adjustments last week, while signaling that further rate reductions seem unlikely. This forecast was supported by stronger-than-expected first-quarter growth, although stubbornly low inflation represents a current concern. In spite of the low-inflation backdrop, select euro zone stocks seem attractively valued with upside potential as the next phase of Europe’s recovery begins.

    A beneficial backdrop for emerging markets

    Emerging market stocks continued to benefit from relatively attractive valuations, a weaker U.S. dollar, and the recent slump in global fixed income yields. This trend may continue if oil prices stay stable and global growth remains relatively on track.

    Signs of U.S. bull market fatigue

    The U.S. bull market seems to be slowing as we head into summer, with the Fed, the U.S. dollar, and earnings growth primary focal points. Cyclical growth sectors have been outperforming as the “Trump trade”—the post-election surge in stocks, bond yields, and U.S. growth expectations—has waned. Technology, Health Care, and a handful of high-profile stocks have recently been driving the markets higher, while other sectors have been showing signs of weakness. As the Fed continues to “normalize” interest rates, we expect challenges for high-yield credit sectors that could translate into stock market volatility.

  • Fixed Income: Fed rate hike probable this week

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    A widely expected rise in rates

    When the Fed meets this week, they’re widely expected to raise short-term interest rates to a target range of 1.00% to 1.25%. Since a rate increase is so highly anticipated, the markets should pay little attention to any increase itself and focus instead on any change in the Fed’s post-meeting statement, Yellen’s question and answer session, and any hints about future rate policies.

    Don’t expect rates to rise much further

    If the Fed raises rates this week, it will mark the fourth rate hike we’ve seen over the past 18 months. These hikes have been part of the Fed’s effort to normalize rates as the U.S. economy has emerged from the global financial crisis. Arguably, a great deal of the Fed’s rate normalization process is complete. Beyond June, the market is currently forecasting only one additional rate hike over the subsequent 12 months. This represents the smallest number of expected hikes for a coming year in quite some time.

    What about President Trump?

    What about him? In spite of the continued media sensationalism regarding who said what, the bond market doesn’t seem to care. U.S. stocks remain near all-time highs, while Treasury yields have continued to trade in a relatively narrow range, with yields on 10-year Treasuries in the neighborhood of 2.25%. As long as inflation remains relatively benign, we expect the Fed to slow its rate-raising efforts, potentially keeping Treasury yields lower for longer.