Charles Schwab Investment Management

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

March 05, 2018

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  • Equities: Volatility reverts to the mean

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Volatility in perspective

    Most equity markets experienced negative total returns in February, ending a 15-month streak of consecutive monthly gains by the S&P 500® Index. Last month also reintroduced volatility to the marketplace. Although for historical context, the CBOE Volatility Index® finished February at its longer-term average of 20, after hovering around 10 for most of 2016 and 2017.

    Hawkish tone from the new Fed chair

    The pace of U.S. monetary policy tightening remains a driver of market volatility. After the recent rise in bond yields, investors are searching for clues on how many rate hikes to expect this year and what any increases might mean for financial market stability. In his first public comments as Chairman of the Federal Reserve, Jerome Powell sounded optimistic about the economic outlook.

    Bond proxy sectors are under pressure

    The recent underperformance by U.S. Treasuries has reflected a combination of rising inflation expectations and increased optimism about the outlook for synchronized global economic growth. Under these conditions, pro-cyclical sectors like Technology, Consumer Discretionary, and Health Care seem well positioned for outperformance. Conversely, a backdrop of solid economic growth and very few signs of overheating mean that bond proxy sectors like REITs, Telecommunications, Utilities, and Consumer Staples might continue to face headwinds.

  • Fixed Income: Inflationary forces awaken

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Jerome Powell’s job just got a lot harder

    After almost a decade of virtually NO inflation, the Consumer Price Index and other inflation indicators began to show some signs of life in February. In response, equities plunged and 10-year Treasury yields rose to nearly 3%. While the Fed has been hoping for inflation to rise for several years now, it’s a mixed blessing for Jerome Powell, who is only weeks into his new role as Fed chair.

    The way it was

    Over the past decade, the Fed hasn’t had to worry all that much about rising inflation. If anything, they’ve been anxious about the relative lack of inflation. This gave the Fed the flexibility to respond to financial market instability. Whenever equity markets experienced a significant bout of volatility, the Fed slowed their rate-raising efforts. This provided significant support for stocks.

    Now it’s all about inflation

    Now that inflation seems to be rising, the Fed will have much less flexibility to respond to any new bouts of financial market instability. The stock market downturn last month underscored this point. While stocks were plunging, expectations for a March Fed rate hike remained quite high. So don't expect the Fed to respond to future market volatility in the same way as in the past. Responding to inflation often comes first for the Fed. It’s a whole new ball game now and this may not be great news for equities.