Charles Schwab Investment Management

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

May 29, 2018


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  • Equities: The geopolitical wildcard

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Geopolitics are driving up oil and the dollar

    Geopolitical events are dominating the headlines, fueling equity market volatility in the process. Middle East tensions and clouded ramifications regarding potential Iran sanctions have driven crude oil prices to their highest levels in years. Meanwhile, ongoing NAFTA negotiations, renewed trade-war concerns, and auto-tariff discussions have triggered a U.S. dollar rally. Emerging markets are paying the price, prompting countries like Argentina, Turkey, and Russia to intervene in support of their ailing currencies.

    European manufacturing activity stumbles

    European manufacturing activity recently stumbled amid seasonal factors and reduced demand growth. However, the European Central Bank’s lack of active response suggests that this is not enough to derail the positive economic growth in the area, implying confidence in their approach to monetary policies.

    Small-caps step up their game

    U.S. sentiment seems a bit more optimistic after the recent earnings season. Small-caps have outperformed year to date, which is historically counterintuitive given where we are in the current economic cycle. Small-caps’ outperformance reflects appealing relative valuations, tax-reform benefits, and a limited sensitivity to currency fluctuations. In addition, signs of fiscal stimulus benefits are translating into greater capital expenditures, additional stock buybacks, and earnings optimism.

  • Fixed Income: Fed minutes…in a minute

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    More rate hikes on the horizon

    The Fed recently released minutes from their early May meeting, where they left rates unchanged and signaled comfort with the level and trajectory of inflation. A few more rate hikes still seem likely this year, and per usual, the Fed’s minutes added context regarding the factors and forces influencing their thinking.

    Goldilocks inflation

    After nearly a decade of extraordinary policy measures, the Fed has become increasingly confident that inflation will stabilize near 2%. Minutes from their May meeting mentioned that tight labor markets and rising input costs have all but removed deflation fears for now. At the same time, the Fed reiterated that they are comfortable with a “symmetrical range” around their 2% target, signaling that inflationary forces are not too hot, and not too cold.

    Risks are modest

    In typical fashion, the Fed discussed risks to their outlook. Notably, members of the Fed acknowledged the flattening yield curve and historically increased recession risk whenever the curve has inverted. Yet some cited the size of the Fed’s balance sheet as a reason why longer-term rates may be artificially low, potentially decreasing the predictive power of an inverted curve. Overall, the minutes showed that the Fed is quite comfortable with inflation, economic growth, and the pace of monetary policy, even though the U.S. economy is entering into its tenth year of expansion.