Charles Schwab Investment Management

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

May 1, 2017

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  • Equities: Stretching to new heights

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Better-than-expected Q1 earnings

    Stocks resumed their bullish run, driven by better-than-expected first-quarter earnings. Consumer Discretionary and Financials have generated positive results so far this earnings season, while expectations for earnings-per-share growth in Technology and Heath Care helped the Nasdaq Composite Index close above 6,000 for the first time ever. On the other hand, softer-than-expected “hard” economic data and rising uncertainty regarding the effectiveness of proposed tax reforms could leave U.S. stocks vulnerable to correction and volatility over the near-term.

    International equity outperformance

    Economic activity in the euro zone seems to be stabilizing, although upcoming elections in France and Germany are fueling increased uncertainty and market volatility. Meanwhile, the European Central Bank plans to keep their current economic stimulus program in place for now, as neither inflation nor wage growth are rising. Among emerging markets, commodity price stability and stronger economic activity in China, combined with U.S. dollar weakness, have been providing strong tailwinds.

    In search of relative value

    We continue to believe that U.S. Financials, Technology, Health Care, and Consumer Discretionary stocks are potentially in a position to outperform. We also like the outlook for international equities, although political speed bumps remain a consideration.

  • Fixed Income: Let’s talk about a June rate hike

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    French elections—good for a Fed rate hike

    France held its first presidential election round last week, and equities couldn’t have been happier with the outcome. The moderate candidate received the most votes and is predicted to win the final round next week. The stock market loved it because “moderate” always seems to beat “radical,” except when Trump is involved. This makes a June rate hike in the U.S. quite possible.

    The U.S. economy—sending mixed signals

    Economic data has been a bit mixed of late. Jobs look good, but not great. First-quarter economic growth was slightly better than forecasted, but not great. The same holds for manufacturing and housing. Most importantly, inflation—particularly wage inflation—is at levels that should allow the Fed to rationalize any decision that it wants to make regarding rates. Ironically, Yellen probably finds all the mixed data ideal because it gives her maximum flexibility.

    What are the markets telling us?

    U.S. stocks remain at or near all-time highs, and as long as radical candidates around the world are giving way to more moderate leaders, this could continue. This backdrop gives the markets comfort and increases the chances of a June rate hike, currently priced in at a 70% likelihood. The Fed’s next rate policy meeting is actually this week. While we’re not expecting any rate change, surely the Fed will provide insights about their thinking for June. But as we know, Yellen could certainly change her mind!