Charles Schwab Investment Management
Biweekly insights on the latest global investment news regarding equities and fixed income from our leadership team.
Equities: Earnings and election anxiety
Omar Aguilar, Ph.D.
Chief Investment Officer,
Equities and Multi-Asset Strategies
A politically charged environment
Investors were highly attuned to equity market developments over the summer, as many U.S. stock indexes reached record highs. However, consistent with past cycles, the upcoming elections appear to have captured the market’s attention, with volatility occasionally spiking as we have been approaching November 8.
The politically charged environment is fueling heightened uncertainty in the Energy, Financials, and Health Care sectors in particular, as these sectors are prone to be affected by new policies. Whether U.S. stocks will experience a relief rally once election matters have resolved themselves is unknowable, but historical evidence suggests that such a result seems likely.
Q3 corporate earnings contract
Third-quarter reports are showing a contraction in U.S. corporate earnings. If this continues, it would mark a sixth consecutive quarter of year-over-year blended earnings declines for S&P 500® companies. Conservative outlooks and mixed results regarding profits have increased the return dispersion among stocks.
U.S. economic stability
The U.S. economy appears stable, propelled by labor market strength, inventory rebuilding, and strong housing market activity. However, a slowdown in consumer confidence and sluggish business expenditures could affect growth in the first half of 2017.
Fixed Income: 44 days to a rate hike?
Brett Wander, CFA
Chief Investment Officer,
What could get in the way
The market is pricing in a relatively high probability of a Fed interest rate hike in mid-December. However, we’ve been down this road many times before, so let’s take a look at several potential events that could derail the market’s expectations.
Based on last week’s odds, Trump has about a 10% chance of winning. His odds may be quite long, but remember how unlikely Brexit seemed prior to the referendum? In my view, a Trump win could spell market volatility and possibly postpone a Fed rate hike, while a Clinton victory might lead to a rate hike in mid-December.
Jobs could disappoint
There are two monthly jobs reports between now and the Fed’s December meeting. If either report comes in significantly below expectations, a rate hike could come off the table. Over the past year, the Fed has looked for, and found, reasons not to raise rates.
Equity market volatility
The Fed seems preoccupied with stock market vulnerability. But market volatility is an unpleasant reality, and a stock sell-off can occur for any number of reasons. So although a Trump presidency and disappointing jobs reports seem unlikely, anything goes. Will there be a rate hike on December 14? My answer is, maybe. Regardless of the outcome, we pledge to accept the results.