Charles Schwab Investment Management

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

October 15, 2018


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  • Equities: Sharing the downward slide

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Misery loves company—stocks and bonds fell

    Solid U.S. economic data, price inflation concerns, rising commodities prices, and seven-year highs on Treasury yields provided a mixed backdrop, translating into market volatility. With the Fed expected to continue raising rates, equity investors are worried about the potentially negative effects of higher borrowing costs on corporate profits and U.S. GDP. A rotation out of growth stocks and into more traditional value sectors that tend to be less sensitive to borrowing costs exacerbated the volatile conditions.

    Trade tensions fanned the flames

    Tech stocks dropped to 15-month lows, with semiconductors falling sharply amid expectations for trade tariffs to reduce profits. New political disputes between Washington D.C. and Beijing drove trade talks to recent lows, fueling this result, with Industrials also losing ground. China’s central bank has been employing a variety of tools to combat the recent U.S. tariffs, while the country’s decelerating economy and weakening currency have added to the pressures on emerging market stocks.

    Keep calm, stay the course

    The selloff has generally been orderly, reflecting the technical factors involved. We suggest focusing on the fundamentals and upcoming U.S. earnings season instead of the media blitz. Now might be a particularly opportune time for your clients to consider rebalancing in light of the market’s recent-year performance.

  • Fixed Income: 10-year yield scare

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    3.25%—but don’t panic, consider the backdrop

    During the first week of October, 10-year Treasury yields jumped to nearly 3.25%, the highest level since 2011. U.S. equity markets turned lower on the prospect of higher rates, but is this yield jump a reason to panic? Not from our vantage point, and below are some key reasons that you can share with your clients.

    A remarkably healthy U.S. economy

    Over recent weeks, we’ve seen signs of underlying economic strength. Consumer sentiment is near its highest levels in more than 14 years, and the unemployment rate fell to 3.7%, the lowest rate since 1969. Trade tensions haven’t affected the real economy as anticipated and recent trade deals with Canada and Mexico were well received. Through all this, inflation expectations haven’t significantly increased, which should contain longer-term rates.

    Supply and demand still matter

    The U.S. budget deficit has been widening for years. In response, the Treasury Department has increased Treasury sales to continue funding government expenditures. At the same time, the Fed has decreased Treasury purchases to reduce their balance sheet. These factors are well known to investors, but less realized is that the increased supply and decreased demand puts upward pressure on yields. Investors should take comfort that inflation isn’t driving up rates and that the benefits of a robust economic backdrop easily outweigh higher rates in the near-term.