Charles Schwab Investment Management

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

September 18, 2017

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  • Equities: Rebounding and rotating

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Overcoming obstacles

    Equity markets are quickly recovering from elevated tensions with North Korea and from the after-effects of hurricanes Harvey and Irma. Although the short-term financial repercussions of the hurricanes have been negative for insurance firms, medium– to long-term U.S. growth prospects should be enhanced by the multi -billion-dollar recovery package approved by Congress.

    Rotating toward stability

    As often happens around this phase of the economic cycle, investors seem to be bracing for a possible equity market correction. Safe-havens have been performing well, with demand for Treasuries, the U.S. dollar, Japan’s yen, and gold on the rise. Meanwhile, market leadership has been shifting from growth– and tech-oriented stocks to Financials and high-quality defensive stocks, like large-cap firms with attractive free cash flow yields.

    Central banks on hold until 2018?

    Low market volatility, limited tax reform progress, and the dollar’s recent appreciation may encourage the Fed to keep interest rates where they are until 2018. Overseas, Europe’s central bank recently decided to keep stimulus measures in place for now.

    Recent trends among emerging market stocks

    With valuations less enticing than early this year, emerging market momentum could start to slow if the dollar strengthens further.

  • Fixed Income: Hurricanes and the muni market

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Long-run economic positives

    The hurricanes were truly devastating, and our hearts go out to all those who were affected. From a purely economic point of view, rebuilding efforts could actually benefit Florida and Texas. Neither state imposes a personal income tax, instead relying upon sales and property taxes for sources of funding. So once construction from the rebuilding process gets underway, this should generate excess sales tax revenues and bolster their economies.

    Minimal credit problems

    No municipal government has ever been forced to miss a principal or interest payment as a result of a natural disaster (according to a leading muni bond rating agency). The recent congressional relief package should help local matters as well. And for historical context, even Hurricane Katrina back in 2005 wasn’t able to keep New Orleans from meeting its obligations.

    Isolated credit concerns are possible

    Any negative long-term credit effects are more likely to involve smaller, less-established projects with relatively narrow sources of revenue. Municipal bond issuers that primarily derive their revenues from tourist dollars may also be negatively affected over the near-term. In addition, although federal and state aid and insurance proceeds should help to rebuild the damaged facilities themselves, there’s still a potentially negative near-term effect on the ability of these facilities to generate revenues in the interim.