Charles Schwab Investment Management

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


March 19, 2018


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  • Equities:
    A new volatility regime

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    March madness for equities

    Global equity markets are experiencing a bumpy ride amid a new volatility regime, fueled by uncertainty regarding the implications of U.S. trade policies and a potential trade war between the U.S. and China. Anxiety surrounding global responses to tariffs on steel and aluminum imports into the U.S. and rising tensions between the U.K. and Russia are translating into U.S. dollar volatility.

    Maneuvering room for the Fed

    Benign inflation data is providing the Fed with room to maneuver. The latest Consumer Price Index readings indicated that inflation is gradually picking up but showing low risks of overheating. This gives the Fed some much-needed relief after the faster-than-expected wage growth shown in the February employment report. Three rate hikes are currently priced into the markets for 2018, and 10-year Treasury yields seem to have stabilized around 2.8%.

    Ongoing headwinds for bond proxy sectors

    With the gradual increase in inflation expectations and potential for fixed income yields to rise in the U.S., the outlook for high-yielding sectors like Telecommunications, Utilities, and REITs remains poor. Conversely, pro-cyclical sectors like Technology, Health Care, and Consumer Discretionary should benefit from the continued growth-oriented environment. Meanwhile, Industrials and Financials are likely to face short-term volatility as the market evaluates the impact of import tariffs and a flatter yield curve.

  • Fixed Income: Markets shrug off steel tariffs

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    It’s never as severe as it sounds

    Since the election in late 2016, the markets have exhibited a recurring pattern in response to all things Trump. First, a major proclamation was announced that appeared to be detrimental to the markets, including proposed policies relating to walls, immigration, North Korea, and trade wars. Then the markets responded, often with stocks and bond yields both falling. The eventual reality usually turned out to be a diluted version of the initial headline, or tweet, followed by a market recovery.

    Scaling back steel tariffs

    A similar pattern seems to be playing out now regarding the recently announced steel tariffs. Bond yields initially fell and stock prices plummeted. However, as the scope of the proposed tariffs seemed to be significantly scaled back, stocks began to recover, while bond yields headed back up to prior levels.

    Cohn’s departure was “so last week”

    Connected to the tariff announcement, the resignation of Trump’s highly regarded economic adviser, Gary Cohn, initially caused bond yields and equity prices to fall. Yet once again the pattern asserted itself, with the markets realizing that the events were only notable from a headline perspective, with talk of trade wars dominating the conversation. In the end, Cohn’s departure is unlikely to have a significant effect on long-run inflation and corporate profits, the ultimate drivers of bonds and stocks.