Charles Schwab Investment Management

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

June 25, 2018


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  • Equities: Still optimistic about equities

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Flight to safety amid trade war tensions

    Recent threats of new tariffs on $200 billion worth of imports elevated the possibility of a trade war between the U.S. and China (combined, the two countries account for roughly 30% of global GDP). Add in NAFTA and trade issues with Europe and near-term prospects fell further. A flight to quality ensued, sending U.S. Treasury yields lower while the yen and U.S. dollar appreciated, posing further challenges for vulnerable emerging markets.

    An optimistic equity outlook

    In spite of the shifting trade-related landscape and expectations for volatility to rise, we remain optimistic about the outlook for U.S. equities in the second half of 2018. Corporate fundamentals are solid, capital expenditures accelerated in the first quarter, and valuations may not yet fully reflect this year’s corporate tax rate reduction. These factors and still-accommodative central bank policies overseas support our relatively optimistic outlook.

    Breaking it down one sector at a time

    What does the current backdrop imply for U.S. economic sectors? Prospects for Consumer Discretionary, Financials, and Technology seem particularly bright as these sectors appear well positioned to benefit from stock buybacks, increased capital expenditures, and the recent corporate tax rate cut to 21%. By comparison, Industrials—particularly steel and capital goods—seem likely to face challenges from any fallout from the current trade tensions.

  • Fixed Income: Fed hikes, EM shudders

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    An end to “easy money”

    Earlier this month, the Fed hiked rates for a seventh time since late 2015. The very next day, the European Central Bank announced plans to wind down its asset purchase program by the end of 2018. Developed markets welcomed the pending end to years of extraordinary policies, but the resulting strong U.S. dollar is creating ripples of financial stress in many emerging markets.

    Dollar gain, emerging market pain

    Over the past few years, emerging market (EM) asset prices and currencies have benefited from a world awash in liquidity, as developed central banks have purchased trillions of dollars of assets to try to stimulate growth. It’s hardly surprising that as this liquidity is being removed, many EM economies are facing currency depreciation and investment outflows. EM currencies have recently fallen about 10%, while local EM debt markets are down around 9%. This is a painful new reality for economies that have grown used to cheap borrowing and easy access to funding.

    Fed stays the course

    The Fed has made it clear that their domestic agenda takes priority over EM stability. So we expect the Fed to raise rates one or two more times this year. EM countries will consequently be forced to defend their currencies by raising rates or selling U.S. dollars to stem capital outflows. It’s a fine balance that has rarely been executed without inflicting pain on fragile EM economies.