Charles Schwab Investment Management

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

October 16, 2017

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  • Equities: A sentiment-driven rally

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Indexes rise to records amid overconfidence

    Sentiment seems to be driving major stock market indexes to new record highs around the world, with the eight-year U.S. bull market recently showing relatively few signs of its age.

    Spotlight on third-quarter earnings

    U.S. corporate earnings are forecasted to decelerate from earlier this year as the third-quarter reporting season gets underway. Homebuilder and insurance company results are likely to reflect the aftereffects of hurricanes Harvey and Irma, while large-cap multinational companies with significant overseas operations may have benefited from U.S. dollar weakness during the quarter.

    International equity market opportunities

    Equities in select European markets look increasingly appealing, in spite of the stronger euro. Global economic conditions have brightened, according to a recent report by the International Monetary Fund. Relative valuations, positive investor sentiment, stable economic growth, and low political risks also appear to favor European and emerging market stocks over the near-term.

    Opportunities and obstacles for U.S. stocks

    Financials and Technology are likely to benefit from the current environment, as should the auto, restaurant, and hotel industries. Bond proxy sectors—like Utilities, Telecommunications, and Consumer Staples—could underperform by comparison.

  • Fixed Income: Fourth week of higher yields

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Treasury yields up for fourth consecutive week

    Yields on 10-year Treasuries recently finished near 2.30%. It may seem like a long time ago when they were around 2.00%, but it was actually only a month ago. A lot has happened since mid-September, and yields have risen pretty consistently ever since.

    Inflation has appeared . . . at least a tiny bit

    It’s hard for bond yields to rise when inflation is low. Finally, after years of mystifyingly subdued readings, we’re seeing the slight inkling of inflation. Consumer prices, wages, and producer prices have all improved slightly. The changes haven’t been huge, but they’ve been enough to give the market a little bit of a kick.

    Tax cuts anytime soon? Doubtful.

    There’s been a great deal of talk about a potential change in tax rates. Whether anything will pass is anyone’s guess. But the mere prospect of lower taxes has helped to drive up yields—at least temporarily. That’s because investors believe that tax cuts would stimulate the economy. Although likely true, it’s anyone’s guess how long any plan might take to push through Congress.

    The stock rally is pressuring bonds.

    We don’t know how long the stock market rally will last, but as long as it does, investors seem preoccupied with equities. So they sell bonds (driving up yields), and buy stocks. This pattern will eventually cease, but for now stock investors are setting the tone.