Charles Schwab Investment Management
Biweekly insights on the latest global investment news regarding equities and fixed income from our leadership team.
Equities: Focused on the horizon
Omar Aguilar, Ph.D.
Chief Investment Officer,
Equities and Multi-Asset Strategies
Q3 corporate earnings
Third-quarter corporate earnings reports are underway in the U.S. Estimates suggest that the latest round will collectively show that profits declined by approximately 2% on a year-over-year basis. Weaker sales growth, currency volatility, and wage pressures are ongoing headwinds. We believe that the Financials, Technology, Materials, and Energy sectors face a higher probability of positive earnings surprises, while Consumer Staples, Telecommunications, and Utilities may experience greater dispersion in their results.
Election-related market volatility is nothing new to the financial markets, with this year serving as a prime example. Historically speaking, the U.S. equity market has generally performed well during election years, with increased volatility heading into Election Day, often followed by a rally after the results are in.
International equities rally
International stock markets have been rallying on the heels of new central bank policies that suggest stimulus programs are helping to stabilize conditions. In particular, equity markets in Japan and Europe have recently performed well relative to U.S. equities, while China and other emerging markets continue to show signs of increased stability. The main remaining uncertainty seems to be the future relationship between the U.K. and the European Union, which has driven the pound sterling to historical lows.
Fixed Income: Fed to raise rates soon?
Brett Wander, CFA
Chief Investment Officer,
Fed minutes send mixed signals
Minutes from the Fed’s late September meeting, released a few days ago, confirm the market’s expectation that a rate hike in December is quite possible. However, we’ve been down this road numerous times before. Over the past few years the Fed has repeatedly spoken of possible rate hikes, but only one (back in December) actually materialized. Even though the market is currently pricing in about a 65% likelihood of a rate hike in December, this could easily change in the coming weeks.
A divided Fed
The Fed’s minutes indicated that there are two distinct camps inside the Fed. One group is led by Yellen and has been on the dovish side, arguing for patience in the timing of future rate hikes. This group is concerned that the labor market has more room to improve, and that inflation remains stubbornly below its target. The other group, the hawks, wanted the Fed to raise rates in September. This group is particularly worried that low rates are prompting asset bubbles as investors look for returns in the credit and equity markets, where levels are near all-time highs.
Equities: The Fed's wild card
After the Fed released their recent minutes, U.S. stocks became particularly volatile. This could be the biggest obstacle to an eventual rate hike, and we've seen this pattern before. The Fed seems hyper-conscious of how their policies can impact stocks.