Charles Schwab Investment Management
Biweekly insights on the latest global investment news regarding equities and fixed income from our leadership team.
Equities: A quick recovery
Omar Aguilar, Ph.D.
Chief Investment Officer,
Equities and Multi-Asset Strategies
The uncertainty principle
Financial markets are stabilizing as the election results were uncontested, but equities initially fell amid uncertainty. Our instincts can lead us to overreact to unexpected investment situations, particularly when behavioral finance influences attempt to subvert our decision-making processes. The fallout from Election Day uncertainty illustrated this point after early signs of a potential Trump win that had previously seemed against all odds.
Expectations for a republican White House and Congress to attempt a selective repeal of Obama Administration policies appear to be helping Health Care stocks, while we believe that uncertainty is likely to increase for Financials and Energy sector stocks as the Trump Administration assumes control. Internationally, emerging market stocks face challenges amid concerns that the U.S. will soon adopt isolationist policies.
On the horizon
Consumer and investor confidence, as well as the economic fallout from the election results, seem likely to influence whether or not the Fed will raise rates in December. After initially dropping, forecasts have returned to roughly pre-election levels, increasing the odds that the Fed will need to act or risk renewed credibility constraints. The November employment report will undoubtedly play a part in the Fed's decision-making process as well.
Fixed Income: In shock? Don't overreact!
Brett Wander, CFA
Chief Investment Officer,
Trump's election, "America's Brexit"
Leading up to the election, a potential Trump presidency had been described as "America's Brexit". There are striking political and financial market parallels. Just as expected, initial reactions on election night included U.S. stocks selling off sharply, Treasury yields falling, and a Fed rate hike in December becoming unlikely. However, just as it took only a few weeks for the markets to normalize after Brexit, it took only a few hours after the election before a number of U.S. indicators normalized.
U.S. financial markets—Recovering
Trump's victory speech seemed to emphasize what the markets wanted to hear. In response, U.S. stocks rebounded, and 10-year Treasury yields rose to around 2.0%, higher than they've been for most of 2016. Lower taxes and more spending would fan inflation, and financing any increased spending would likely mean an increase in government debt issuance. All this is possible, as the republican party will soon control the Oval Office and Congress.
A December rate hike—Still likely
The market's immediate reaction to Trump's victory suggested that a December rate hike was off the table. But, as U.S. markets recovered, expectations returned to recent levels. Our translation: The December rate hike may still be on, assuming no surprises from the November jobs report. So try not to overreact to the volatility, but don't expect the volatility to disappear anytime soon.