Charles Schwab Investment Management

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

October 1, 2018


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  • Equities: A fundamentally supported bull

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Foundational support from the fundamentals

    A solid and growing U.S. economy, supportive fundamentals, and elevated optimism actively supported the run-up in domestic stocks in recent weeks. U.S. firms have repatriated assets due to this year’s fiscal stimulus, driving up capital expenditures and stock buybacks in the process. Additionally, an 18-year high in consumer confidence raised the odds for robust holiday spending.

    Stocks powered past tough trade talks

    The Trump Administration recently imposed 10% tariffs on $200 billion of Chinese products. China immediately countered, imposing 5% to 10% levies on $60 billion of U.S. goods. Although tense, trade talks between the countries were less heated than expected, setting the stage for a global relief rally by equities.

    International equities joined the party

    The global relief rally handed international equities an invitation to join U.S. stocks in their bullish run, with emerging market stocks benefiting the most. U.S. dollar depreciation versus many major currencies also helped, reflecting a previously locked portion of China’s stock market opening up to international investors. Nevertheless, the market backdrop in Europe remains challenging amid relatively limited economic activity in the euro zone, a drop off in global demand due to U.S. trade tensions, the Brexit-related fallout, and expectations for the European Central Bank to begin raising short-term rates at some point in the foreseeable future.

  • Fixed Income:
    Rates are almost normal

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    What a low, strange trip it’s been

    Since the global financial crisis, the Fed has kept short-term interest rates below the rate of inflation, a condition known as “negative real rates.” The Fed’s objective was to dissuade investors from hoarding cash, encourage them to buy risker assets instead, and drive up economic growth in the process. It worked! Now the era of negative real rates is almost at an end and an era of “normal real rates” is about to begin.

    So what’s normal for short-term rates

    Historically, interest rates on cash have usually been about 1.0% above inflation. Currently, the federal funds rate is about the same as core inflation at 2.2%, which means it’s approximately 1.0% below “normal” cash levels. The Fed recently met and forecasted additional rate hikes, concluding that 100 basis points (1.0%) of hikes by the end of 2019 is the most likely scenario. This would likely bring short-term interest rates right to the normal level.

    What’s normal for long-term rates

    In recent years, 10-year Treasury yields have averaged 1.0% to 1.5% above the level of inflation. With 10-year Treasury yields currently hovering around 3.0%, the markets are implying that inflation seems well contained and that a 2.0% to 2.5% inflation rate long-term seems very reasonable. Should faster inflation unexpectedly arise, Treasury yields would likely increase in response. But for now, rates are almost normal.