Charles Schwab Investment Management

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

June 26, 2017

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  • Equities: All-time highs continue

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Narrowing economic data gap, but more to go

    The gap between survey-based “soft” economic data and more recently reported “hard” economic data has narrowed, but has further to go before reaching congruency. Equities seem to be pricing in best-case economic and fiscal-stimulus scenarios, so the bull market’s strength could be tested if economic data show signs of weakness or notably miss expectations. Meanwhile, the recent performance dispersion among sectors has been remarkable, with Technology and Health Care sectors outperforming, while Energy and Financials have underperformed.

    Higher rates, but lower bond yields

    The Fed raised interest rates as expected in mid-June, but slow wage growth and tame inflation could keep bond yields lower for longer than initially expected. Falling yields among fixed income securities have initiated a rotation back to dividend-paying stocks, as investors search for alternative sources of income. Defensive equity sectors could benefit from this environment, especially if volatility rises and fixed income credit spreads begin to widen.

    Pre-Election Day oil prices

    Oil prices recently dropped to pre-U.S. Election Day levels. Crude oil inventories remain elevated and global demand has not sufficiently recovered to offset the over-supply being led by U.S. shale crude oil producers. As a consequence, Energy stocks have underperformed the S&P 500® Index® by roughly 20% this year.

  • Fixed Income: Happy birthday Brexit!

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    One year later

    June 23 marked the one-year anniversary of the infamous Brexit vote. Remember how dire the world looked back then? The prospect of the U.K. leaving the European Union seemed hugely daunting. Equities plunged globally, currency markets swung wildly, and a sense of uncertainly was globally pervasive. All-in-all, things haven’t been nearly as bad as expected. Economic activity in the U.K. and broader Europe has been remarkably resilient, stocks have recovered, and U.K. real estate prices are up!

    U.S. Markets don’t seem to care

    Now one year later, Brexit has become kind of an afterthought in the U.S. Headlines are dominated by stories related to President Trump. Despite all the noise, the stock market continues to hit new highs, the economy continues on its upward but slow-recovery trajectory, and bond yields continue to stay low. Although U.S. investors seem to find it interesting that Theresa May lost her majority in the recent U.K. elections, it’s much more of a human interest drama than a fundamental market or economic event.

    The Fed doesn’t seem to care

    The Fed recently raised rates as expected, and the hike was so highly anticipated that equity markets barely moved. And while the Fed always underscores its need to remain vigilant regarding global economic risks, there was barely any reference (direct or indirect) to Brexit, and that’s not likely to change going forward.