Charles Schwab Investment Management

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

October 29, 2018


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  • Equities: Keep calm and weather the storm

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Market volatility returned with a vengeance

    Optimism was replaced by long-absent fear and pessimism in recent weeks. Slowing global economic growth was the item that seemed to tip the scales recently, prompting a stock market route that erased most of the U.S. equity market’s gains for this year.

    Economic fundamentals should provide support

    U.S. economic growth has been above trend with few concerns that inflation is overheating. In addition, with roughly 25% of S&P 500® Index companies having reported their results so far, the current earnings season is shaping up to be one of the best since early 2011. Equity markets appear to be unimpressed in spite of this result, plagued by anxieties about whether the Fed will be able to maintain the current economic balance.

    Stay calm and stay invested

    Although market volatility has risen this month, it’s important to remember that current volatility levels are close to average long-term levels, and only elevated compared with recent years. Solid corporate profits and consumer spending should support equities going forward, an environment that we think may benefit banks, Consumer Discretionary, Technology, and Health Care the most. We believe that time in the market is a better strategy than trying to time the market, and that current conditions provide an opportunity to reassess your clients’ risk tolerances to help ensure that they are prepared if overall volatility continues to rise.

  • Fixed Income: Farewell to mortgage refis

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Mortgage rates up, refinancing down

    As interest rates have been rising in recent years, borrowing costs have been rising, too. From governments, to companies, to individuals, everyone is paying more to borrow money. Higher mortgage rates are of particular note. This makes it more expensive to buy a home and reduces the ability to play the mortgage refinancing game. It also limits taking out equity to buy goods and services and concurrently support economic growth.

    The end of an era

    In response to the financial crisis, the Fed cut short-term rates to zero and bought trillions of dollars of Treasuries and mortgage-backed securities. This ushered in an unprecedented refinancing era, allowing the majority of homeowners to refinance into lower-rate mortgages, reduce their monthly payments, and free up spending cash. Just a few years ago, a 3% mortgage rate wasn’t too unusual. Fast forward to today, and it’s, “Say hello to 5%!”

    So what’s the impact on housing

    The Mortgage Bankers Association recently reported that refinancing activity fell to an 18-year low. With 30-year mortgages around 5%, roughly 95% of conventional borrowers can no longer significantly reduce borrowing costs by refinancing. This has contributed to a housing sector slowdown, with home sales and building permits falling. It’s a double hit to homeowners: they can no longer borrow as cheaply and the housing market is cooling.