Charles Schwab Investment Management

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

September 5, 2017

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  • Equities: The end of the beginning, or ...

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    ... the beginning of the end?

    August was the U.S. equity market’s worst-performing month since before Election Day, occurring in spite of solid underlying economic data and strong second-quarter corporate earnings results. On the surface, this may seem like the start of a correction, given that stock valuations have been trading above their long-term averages for quite some time. However, this year’s momentum-driven rally in cyclical stocks has continued to perform well, with shares of select Technology companies and online retailers outperforming the broader market. So for the moment, equities may have some room left to run, although it is important to realize that current conditions have historically signaled the start of a bull market’s final phase.

    Proceed with caution ahead of the fall

    There are plenty of reasons to be cautious as summer winds down and fall approaches. In particular, geopolitical risks have risen as tensions with North Korea have escalated. This could translate into increased demand for traditional safe-havens like Treasuries, gold, and the U.S. dollar. Uncertainty surrounding upcoming policy decisions regarding the U.S. debt ceiling, potential government shutdown, budget negotiations, and tax reform could spark market volatility. In addition, although most natural disasters tend to have a limited long-term growth impact, Hurricane Harvey has already resulted in short-term ramifications for gas prices, oil refiners, and insurance companies.

  • Fixed Income: Shutdowns and debt ceilings

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Washington D.C.’s crazy time of year

    This is the time of year when things get really crazy in D.C. Market pundits are focusing intently on the potential for a federal government shutdown and failure to raise the debt limit. Contrary to common misperceptions, these two scenarios are quite distinct, and can have hugely different consequences.

    Shutting down the Federal Government

    If Congress and the president fail to pass a budget by September 30, the government will shut down. Shutdowns have happened 17 times over the past 40 years, so they’re hardly unprecedented. In fact, most critical functions like military and emergency services aren’t affected. However, family vacation plans to Yellowstone may require a Plan B. The markets wouldn’t love a shutdown, but they’re usually only a few days, so the impact could be muted.

    Failure to raise the debt limit

    Now this would not be good! For the Treasury to pay its debts, it has to issue new debt, and this requires an increase in the debt limit (ceiling). If Congress fails to raise the debt ceiling by early October, absent “extraordinary measures,” the government would face the possibility of temporarily defaulting. Stock and bond prices would likely fall, and if that happened, the U.S. dollar would lose its safe-haven status. Congressional leaders have assured the public that they’d never let this happen. But just to be extra safe, avoiding Treasuries maturing in October might make sense.