Charles Schwab Investment Management
Biweekly insights on the latest global investment news regarding equities and fixed income from our leadership team.
Equities: Soaring to new heights
Omar Aguilar, Ph.D.
Chief Investment Officer,
Equities and Multi-Asset Strategies
Stocks are benefiting from tailwinds
Fueled by strong corporate profits and favorable economic data, the major U.S. stock indexes recently reached fresh record highs. “Animal spirits” and momentum-based trading have generally been propelling stocks to above-average valuations, helped by expectations for a faster pace of U.S. economic growth.
A surprisingly hawkish Fed
Janet Yellen seems determined to raise interest rates faster than her commentary last December seemed to imply, with forecasts of a rate hike in March climbing from the start of this year. The odds of a March rate hike increased further still after Yellen’s congressional testimony last week. If anything, this seems to signal that the U.S. economy is increasingly stable amid a solid labor market and even early indications of a pickup in inflation.
Volatility around the corner
Many traditional volatility metrics have fallen to all-time lows since the election. In spite of this, we think that an increase in volatility is only a matter of time. Brexit and the related effects on broader Europe, potential shifts in U.S. trade policies, and the timing and extent of U.S. tax reform and infrastructure spending are among the many unknowns that could ignite market volatility. Nevertheless, we continue to favor the Financials, Energy, and Industrials sectors over the Utilities and Telecommunications sectors, as well as over retail industries.
Fixed Income: Beware the Ides of March!
Brett Wander, CFA
Chief Investment Officer,
A lot’s changed lately
Just a few weeks ago, a rate hike at the Fed’s March 15 meeting seemed unlikely. The Dow was “languishing” below 20,000. And every day and in every way, Trump dominated the headlines—his latest tweets and his comments on immigration, trade wars, and walls. The forecasted probability of a rate hike in March was about 25% heading into February, but that’s risen to roughly 35%.
Recent data has been pretty good
A few weeks ago, the economic data looked rather mixed. But things have improved. The latest employment report came in stronger than expected, with 227,000 new jobs created in January. Also, recent producer and consumer price readings were stronger than expected as well. If this trend of improving economic data continues over the coming weeks, a March rate hike will become increasingly likely.
Neither the market nor Yellen like uncertainty
Yellen has been dovish on rates for what feels like forever, and like the market, she prefers transparency to uncertainty. Janet’s quite aware of the impact that the Fed can have on the market. And she wants to make sure that the market knows what to expect policy-wise. With about a month before the Fed’s next meeting, things are still up in the air. However, as we approach that fateful day in March, Yellen will no doubt be under significant pressure to signal the Fed’s intentions—one way or another—ahead of time.