Charles Schwab Investment Management

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


November 26, 2018


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  • Equities: If you don’t know where you’re going

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    . . . you’ll end up somewhere else

    Whipsawed by U.S. midterm elections, equities retreated after a short relief rally in early November, while volatility remained elevated. Anxieties over growth prospects for the Tech sector weighed down the performance of the FANG stocks—Facebook, Amazon, Netflix, and Alphabet (Google’s parent company). Meanwhile, U.S. oil prices have fallen further in November, shaken by fears of oversupply and weak demand for commodities. In spite of this backdrop and October’s market meltdown, the S&P 500® Index remains in positive territory for 2018, while outperforming the majority of major foreign markets by a considerable margin.

    The cleanest dirty shirt in the basket

    Although in what is likely the final phase of its current expansionary cycle, the U.S. economy remains on solid ground, supported by a tight labor market, rising consumer spending, and a balancing act between monetary and fiscal policy on one side and absent inflation on the other. By comparison, Germany’s and Japan’s economies contracted in the third quarter, and China’s economy grew at a slower-than-expected pace.

    Strong U.S. dollar and a potential trade deal

    The recent flight to quality, expectations for U.S. rates to rise, and concerns about the political landscape in Europe propelled the U.S. dollar higher. In addition, hope recently rose yet again for the U.S. and China to resolve their ongoing trade dispute.

  • Fixed Income: Inflation is cooling down

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Inflation hits a soft patch

    After peaking in the summer, the Consumer Price Index, Personal Consumption Expenditures, and most other measures of inflation have been drifting toward the Fed’s 2% target. With oil recently suffering its most severe decline in three years and the housing market slipping on a soft patch, there’s little evidence that the U.S. economy is in danger of overheating any time soon.

    The Fed shifts into neutral

    Despite tight labor market conditions, cooling price inflation alleviates the need for the Fed to shift short-term interest rates into overly restrictive territory and tap the economic brakes. Fed Chairman Powell recently suggested that there’s still room to raise rates before monetary policy is having a neutral effect on the U.S. economy. This is consistent with the market’s current expectation for a rate hike in December, two or three hikes in 2019, and then the potential for a pause while the Fed evaluates its efforts.

    Treasuries unbothered by equity volatility

    Treasury yields have been surprisingly stable in spite of the contentious midterm elections and stock market volatility. Forward-looking inflation expectations have been drifting lower, but remain near the Fed’s targeted 2% threshold. This relative yield stability reflects the consistent outlook for stable inflation, even as equity market volatility has spiked.