Charles Schwab Investment Management

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

September 4, 2018


Download PDF
  • Equities: The bull just keeps on running

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Powered by Tech, the bull kept running

    U.S. stocks posted record highs in August, led once again by Technology. The Nasdaq Composite Index crossed 8,000 only a few months after crossing 7,000, driven by some of the more popular mega-cap Tech stocks. More broadly, the S&P 500® Index crossed 2,900 for the first time amid ongoing signs of U.S. economic strength. In fact, all sectors except Energy generated positive returns since the end of June amid greater capital spending and solid corporate earnings, supporting valuations.

    A stable and growing global economy

    Recent upward revisions to GDP suggest that the U.S. continues to grow without obvious signs of economic overheating. Meanwhile, consumer spending has continued at a healthy clip and recent inflation figures have risen to a six-year high, giving the Fed justification to raise rates gradually. Supported by central bank policies and slow inflation progress, Europe and Japan are showing signs of strength after a recent economic soft patch.

    Ongoing trade talks and fading fears

    Global currencies and commodities recently surged on news of a potential trade deal between the U.S. and Mexico. Most emerging market economies seem stable in spite of the ongoing trade talks, although exceptions like Argentina and Turkey may continue to stir up the headlines. In addition, U.S. dollar strength remains a major headwind for many emerging markets and commodities.

  • Fixed Income: Rate hikes won’t go on forever

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    The Fed vs. the market

    The Fed hiked rates three times in 2017, and this year is shaping up to be a repeat at minimum. In fact, the market is currently pricing in a near certainty of a 25 basis point (0.25%) rate hike when the Fed meets to talk about interest rates in September. The odds are also pretty good for what might be a fourth hike in December. Far less certain is what investors might see next year.

    Put your money where your dots are

    In 2012, Fed Chairman Ben Bernanke pushed the boundaries of U.S. central bank transparency by publishing the anonymous interest rate forecasts (dots) that are generated at each of the Fed’s interest rate meetings. Currently, these dots suggest that the Fed believes that three rate hikes will be appropriate in 2019. In contrast, the markets are only pricing in a single hike for next year, and none whatsoever in 2020. Why the disconnect, you ask?

    Fool me once, shame on you; fool me twice . . .

    For several years now, the Fed has often been far slower to raise rates than they had initially indicated. As the old saying goes, fool me once, shame on you; fool me twice, shame on me. The Fed has also stated that we’re approaching a “neutral” level for the federal funds rate, meaning that additional hikes beyond such a level could be economically restrictive. And then there’s the flat yield curve, occasional crisis like Turkey, and the geopolitical backdrop, which makes for a lot of uncertainty. Stay tuned!