Charles Schwab Investment Management

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

March 6, 2017

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  • Equities: An unstoppable bull?

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    The Dow—20K to 21K in weeks

    It took only a handful of weeks for the Dow Jones Industrial Average to reach 21,000, after crossing 20,000 in late January. U.S. stocks have continued to stretch to fresh record highs, benefiting from solid corporate earnings and forecasted profit growth resulting from anticipated corporate tax reforms.

    Rate hike probability has been on the rise

    Current forecasts show a 90%+ probability that interest rates will rise on March 15, more than double forecasts from early February. This seems to indicate an increasingly stable U.S. economy progressing toward the Fed's employment and inflation targets.

    Currency-related ramifications

    The direct implications of any potential rise in interest rates will likely be felt in the foreign-exchange markets. Although the U.S. dollar has generally depreciated in 2017, this could change rapidly if the Fed raises rates and U.S. economic growth accelerates.

    Growth and momentum rotation

    After notable value and small-cap stock outperformance in 2016, momentum- and growth-oriented stocks have been returning to favor. This could continue if capital expenditures and investor and consumer spending accelerate in the coming months. Financials, Technology, Materials, and Energy stocks continue to seem well positioned for this environment.

  • Fixed Income: Everything's been up but yields

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Trump—still moving the markets.

    Trump's speeches, tweets, and other comments seem to be giving the stock market exactly what it wants to hear. Nevertheless, bond yields have risen far less than you might expect this year.

    Show me the inflation.

    Despite all the recent optimism regarding corporate profits, tax reductions, economic growth, and fiscal spending, it's just not showing up inflation-wise. Consumer prices, producer prices, and wage growth are telling the same story—inflation still looks low.

    Even the Fed can't raise long-term rates!

    It's looking increasingly likely that the Fed will raise rates next week. But as we know, the Fed only controls short-term rates. Ironically, by raising short-terms rates, and appearing to be out in front of inflation, long-term bond yields could actually fall.

    Anything to learn from history? Maybe.

    The last two times the Fed raised rates (December 2016 and December 2015), Treasury yields actually fell in the subsequent weeks. Will history repeat itself? Possibly.

    Have you seen overseas bond yields lately?

    Yields on 10-year government bonds from other highly developed countries like Germany and Japan are near 0%, making the 2.5% yield on a 10-year U.S. Treasury look pretty good by comparison.