Charles Schwab Investment Management

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

November 13, 2017

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  • Equities: Mean reversion for the holidays?

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Equity markets have been unstoppable ...

    Solid year-over-year corporate earnings and robust economic data are keeping U.S. stocks in record territory. U.S. large-cap growth has outperformed large-cap value by more than 17% so far this year (through late last week), with a notable performance dispersion between the Technology and Energy sectors playing a prominent role in these lopsided results.

    ... but banks are being kicked off the ride.

    The flattest yield curve in a decade is creating profitability constraints for many banks. Firms highly dependent on lending revenue are facing tough times as the interest rate spread, or yield difference, between borrowing short and lending long has compressed amid a global outreach for yield.

    Small-caps have been buffeted by headwinds.

    Small-caps have enjoyed solid gains so far in 2017. However, renewed skepticism about the fate of the House’s tax reform bill seems to be keeping further gains in check for now.

    Rebalance for the win, while it makes sense.

    After an impressive run by U.S. stocks over the past 12 months, mean reversion may be setting in for the holidays. The U.S. dollar has appreciated amid rising rates, commodities have rallied, and emerging markets have slowed their frenetic pace of gains. As a result, now may be an opportune time to think about rebalancing.

  • Fixed Income: Jerome Powell, the new boss,...

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    ... same as the old boss.

    Last week, President Trump nominated Jerome Powell to chair the Fed and replace Janet Yellen. The markets hardly moved on the news. For one thing, Trump had already telegraphed the likelihood of nominating Powell weeks earlier. More importantly, Powell is expected to follow the same cautious yet consistent approach that Yellen has already established.

    An imminent rate hike

    Yellen has made it clear that a rate hike in December is imminent, and that a few more hikes in 2018 will follow. Powell, who seems set to take over in February, is likely to follow Yellen’s playbook. So Powell will likely have one foot on the rate-hike pedal, while being fully prepared to hit the brakes if the U.S. economy stumbles.

    The international appeal of U.S. Treasuries

    U.S. bond investors have been anticipating a dramatic rise in U.S. government bond yields for several years now. Yet even if Powell turns out to be a bit more hawkish than expected, U.S. bond yields are unlikely to rise quickly. As long as yields in the U.S. remain well above those in Europe, then global bond investors will be pulled toward U.S. fixed income, which should keep U.S. yields in a narrow range for some time. Even a few unexpected rate hikes by the Fed shouldn’t drive up longer-term rates in the U.S. Treasuries are currently yielding about 2% more than German bunds, making U.S. bonds seem like a pretty good deal!