Charles Schwab Investment Management

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

May 30, 2017

Download PDF
  • Equities: Europe still has upside potential

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    The reflation trade gets a second wind

    The first-quarter earnings season is essentially over. More than 75% of S&P 500 firms announced better-than-expected earnings and roughly 65% beat sales forecasts. Adding to this favorable backdrop was a rotation into growth-oriented sectors like Technology and Health Care, and into consumer cyclicals like auto makers and home building stocks. Meanwhile, stable economic growth and a positive trajectory for the labor market should make it possible for the Fed to raise interest rates again in June.

    A summer volatility spike is possible

    Elevated valuations, political uncertainty, and low volatility levels increase the odds for a correction. After recently reaching a two-decade low, the CBOE Volatility Index® may trend higher over the summer amid seasonal factors like low trading levels and higher buy/sell spreads. With this in mind, we continue to believe that Technology and consumer cyclicals could perform well, while being cautiously optimistic about Financials and Energy.

    European equities still have upside potential

    With political uncertainty in Europe a diminishing concern, local equity markets have been rallying amid signs of healthier manufacturing activity and rising consumer confidence. Lending activity and inflation prospects are encouraging, while the euro appears to be undervalued. As a result, we currently favor European stocks over U.S. and emerging market opportunities.

  • Fixed Income: Bond yields likely to stay low

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Failing immunity and heightened uncertainty

    Countless headlines and tweets from President Trump about immigration, health care reform, tax reform, decreased regulations, and walls generated surprisingly little market volatility during the new administration’s first few months. That is, up until about two weeks ago, when everything changed, a new light was shed on Trump’s activities, and stocks suffered sharp losses. With this in mind, here are some interest rate perspectives.

    Political uncertainty ≠ economic uncertainty

    The markets dread uncertainty. But political uncertainty doesn’t necessarily equate to economic uncertainty, even with the word “impeachment” floating about quite freely these days. Over the long term, the state of the economy seems to be what the markets care about most. On that front, continued encouraging inflation and jobs data argue for a June rate hike by the Fed.

    Yields are likely to remain low for quite a while

    Despite the Fed’s best efforts to reflate the U.S. economy, and Trump’s promises for a slate of growth-oriented policies, the factors that drive inflation are so firmly ingrained at this point that inflation should remain low for a long time. Consequently, bond yields should remain low too, especially given that yields on international bonds in developed markets are lower than yields on Treasuries. Even a June rate hike isn’t likely to drive up longer-term U.S. bond yields.