Charles Schwab Investment Management

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

May 15, 2017

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  • Equities: A favorable backdrop

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    The upbeat Q1 earnings trend continued.

    The positive trend of first-quarter earnings continued last week. More than 85% of S&P 500 companies reported their quarterly results through last Friday, with over 75% exceeding expectations. Large-cap U.S. stocks in growth-oriented sectors have generally been outperforming small-cap, defensive sector counterparts.

    Stock market volatility remained subdued.

    Traditional gauges of equity market volatility like the CBOE Volatility Index®, or VIX®, have recently fallen to their lowest levels in approximately a decade, despite geopolitical tensions and ongoing political headlines out of Washington D.C. On the interest rate front, the solid April employment report underscored the positive trajectory for the U.S. economy, pushing up the forecasted probability that the Fed will raise rates in June.

    Relative valuations are appealing in Europe.

    Positive economic activity in the euro zone and the decisive results of the recent presidential election in France are generating stability in Europe. European Central Bank efforts, stronger business confidence, and increased lending activity underscore the upside potential in the region. Meanwhile, China’s relatively weak recovery, limited inflation, and a sluggish labor market are obstacles for emerging market stocks. As a result, we currently favor developed markets when looking internationally, and like Technology, Financials, and consumer cyclical stocks in the U.S.

  • Fixed Income: Remarkably low volatility

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Market volatility has been extremely low.

    Despite all the uncertainty of late, most market volatility measures are portraying a picture of relative stability. The factors and forces driving the markets haven't changed that much. Yet volatility in the equity markets, as typically gauged by the VIX, is well below long-term averages, while yields on 10-year Treasuries seem stuck between 2.25% and 2.50%.

    Did you see President Trump’s latest tweet?

    Whether it's walls, taxes, health care, Russia, or North Korea, the market doesn’t seem to care as much about Trump’s latest tweets as it did early this year. After all, his tweets appear to indicate very little about how policies will likely progress.

    Did you hear what Janet Yellen just said?

    Yellen’s comments just don’t seem to matter as much anymore. The Fed appears likely to raise rates in June, and perhaps again later this year. But the timing no longer seems critical. That’s a far cry from late 2015, when the first rate hike in nearly a decade was big news. The market seems to be saying that irrespective of rate policy, inflation and economic growth are progressing very slowly.

    What about the monthly jobs reports?

    March was a bit disappointing, yet April exceeded forecasts. The trend seems positive overall, yet it’s an uninspiring picture of relative health. What does it all mean? Quiet markets ... for now.