Charles Schwab Investment Management

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

October 3, 2016

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  • Equities: Fed tailwind

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Post-meeting rally

    Equity markets around the globe rallied and bond yields stabilized after the Federal Reserve’s recent decision to leave interest rates unchanged for now. However, Chair Janet Yellen and other Fed officials presented a strong case for raising rates later this year, with federal funds futures currently pointing to December as likely timing for a rate hike. Rising oil prices supported the further appreciation of riskier assets, as OPEC’s meeting in Algiers concluded with an agreement to reduce crude oil output.

    Central banks shift focus

    The Bank of Japan’s (BOJ’s) recent policy decisions implicitly acknowledged that its negative interest rate policies are not proving as effective as forecast in stimulating growth. In a surprising move, the BOJ is now targeting an upward-sloping yield curve—where yields on shorter-term bonds are lower than yields on longer-term bonds—to ensure a healthier financial system. The European Central Bank is considering whether or not to adopt a similar approach as the crisis of confidence in European financial institutions remains an ongoing concern.

    Growth is the new Value

    With a rate hike looking likely by the end of this year, undervalued cyclical sectors like Technology and Industrials have recently generated impressive returns, while traditional defensive sectors like Utilities and Telecommunications have underperformed.

  • Fixed Income: Trump vs. the Fed

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Short-term rates

    Trump was hugely critical of Yellen last week. It’s unusual for a presidential candidate to criticize the Fed, but then just about everything about this year’s race to the White House has been unusual. If Donald is elected, might he try to force Janet out? Yellen has been one of the more dovish voices inside the Fed. So if she left, the Fed would likely become more hawkish, which could translate into higher short-term interest rates.

    Long-term rates

    Accurately predicting long-term rates is about as difficult as predicting the outcome of this year’s election. Nevertheless, let’s try. There’s a lot of uncertainty regarding what a Trump presidency might look like. Since investors tend to shy away from risky assets when times are uncertain, a Donald win could cause stocks to tumble. As investors then turned to safer assets, they might buy Treasuries, which could cause long-term rates to fall.

    Winds of change

    Yellen no doubt knows about Trump’s recent comments, even if she was watching Monday Night Football instead of the debate. Janet’s Fed colleagues are almost certainly aware of the political landscape as well. So it seems quite probable that all the rhetoric is affecting the Fed's thinking. The Fed is supposed to function outside of the Executive, Legislative, and Judicial branches. However, the times could be a-changing, and so could rates!