Charles Schwab Investment Management

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

October 30, 2017

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  • Equities: Q3 earnings kept the rally afloat.

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Large-caps generally led, while biotechs lagged.

    Corporate profits have generally been beating estimates, giving equity indexes around the world a lift to repeatedly stretch to new record highs. Many large-cap tech companies have been announcing impressive results, with multinationals benefiting from the weaker U.S. dollar and globally synchronized economic recovery. On the other hand, biotechs—large to small, alike—have been enduring their worst reporting season in two years, disappointing investors on the earnings front while facing industry -wide concerns in the form of heightened political pressures.

    ECB: Yes to taper, no to tantrum.

    The euro declined and European stocks rose after the European Central Bank announced plans to end its bond buying program in September 2018. Unlike the Fed’s 2013 announcement that led to the “taper tantrum” and a spike in bond yields, Mario Draghi’s announcement pushed yields lower globally. That left investors to focus on a possible rate hike by the Fed in December and pending announcement of the president’s pick for the next Fed chair.

    International equities haven’t lost their luster.

    We continue to think that developed international markets and emerging markets look more appealing than U.S. stocks. Within the U.S., Technology, Financials, homebuilders, autos, and hotels seem well positioned to outperform, while Consumer Staples, Utilities, and Telecommunications may underperform the market.

  • Fixed Income: A new Fed chairperson?

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    A new Fed chair is in the works.

    Any day now Donald Trump is expected to announce a new head of the Federal Reserve. The leading candidates are current Fed Governor Jerome Powell, Stanford University economist John Taylor, current Fed Chair Janet Yellen, and a small handful of other less-likely possibilities. When the announcement comes, it will likely be the headline of the month. But what it means for markets and the economy isn’t really clear.

    Do the markets care?

    Not as much as you’d think. Under normal circumstances, the choice of Fed chair might have a rather significant impact on markets. But in this case, it may not be such a big deal. The Fed is well on its way to normalizing rates, the Fed’s balance sheet is being reduced (very slowly), corporate earnings are coming in strong, the stock market continues to climb, and inflation continues to appear benign. None of this seems likely to change, irrespective of who’s in charge at the Fed.

    Does the Fed chair even control interest rates?

    Certainly. But not in the way we might think. First of all, the Fed only controls the overnight rate. Longer-term bond yields are driven largely by inflation expectations and growth forecasts. It’s also important to remember that the Fed’s Open Market Committee is comprised of 12 members. While the chair wields the most power, they’re not the only voice in the room.