Charles Schwab Investment Management

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

November 27, 2017

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  • Equities: Plenty of reasons to give thanks

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    A solidly bullish run by stocks so far in 2017

    Global equity markets have many reasons to be thankful. A stable, synchronized global economic recovery is underway, with stronger growth driven by manufacturing activity improvements. The Fed is normalizing rates in an orderly manner, and the European Central Bank and Bank of Japan are reducing their stimulus programs for now, instead of halting them altogether. So far in 2017, upbeat investor and consumer sentiment has fueled considerable market momentum, translating into a solidly bullish run by stocks globally.

    Feasting on third-quarter earnings

    In the U.S., more than 70% of S&P 500 companies reporting third-quarter earnings have beaten bottom-line estimates. The market has been handsomely rewarding good news, allowing shares of companies announcing higher top– and bottom-line estimates to outperform the broader S&P 500 Index. International results have been even more impressive, with many European firms delivering faster earnings growth in a variety of cyclical sectors.

    The final phase of the bull market

    The last phase of the bull market could herald volatility heading into 2018. Increased capital expenditures, more merger-and-acquisition deals, and a flatter yield curve are likely to continue driving performance. With political uncertainty in the U.S. a likelihood next year, now might be a good time to consider talking with your clients about the potential benefits of rebalancing.

  • Fixed Income: A tax reform curveball for munis

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    A curveball for the muni market

    Congress threw the municipal market a curveball when they included language in the proposed tax reform bills that would significantly curtail the issuance of new tax-exempt muni bonds. If tax reform were to pass in the current House form, approximately 40% of new supply could be eliminated from the market.

    Muni bonds rallied in response

    The muni market rallied strongly following the release of the House bill, significantly outperforming Treasuries. The rally was largely driven by the threat of reduced supply, with concerns over the potential for reduced demand mitigated by minimal proposed changes to the top tax brackets.

    In addition, potential reductions or eliminations of state and local deductions, as well as a possible reduction in mortgage interest deductions, could lead high-wage earners to look for other ways to limit their tax bills, potentially driving up demand for munis.

    Following the release of the Senate plan, which would only impact approximately 10% of muni supply, the market reversed some of its earlier outperformance of Treasuries.

    Muni market volatility on the horizon

    As tax reform works its way through Congress in the coming weeks, we expect continued volatility in the muni market, with these securities potentially settling into a new trading range.