Charles Schwab Investment Management
Biweekly insights on the latest global investment news regarding equities and fixed income from our leadership team.
Equities: Volatility is back in session
Omar Aguilar, Ph.D.
Chief Investment Officer,
Equities and Multi-Asset Strategies
Equity market volatility has soared recently, as investors attempt to predict the timing of the Federal Reserve’s (Fed’s) next interest rate hike, and the implications of the recent sell-off in bonds. Amid these ruminations, global equities have lost approximately $2 trillion in value since Brexit, and global bond market turbulence has picked up this month.
Waning central bank confidence
Confidence in the ability of central banks to stimulate economic activity seems to be eroding. European Central Bank (ECB) President Mario Draghi refrained from increasing the ECB's aggressive stimulus program during the bank's most recent policy meeting. Meanwhile, the Bank of Japan continues to assess the effects of its policies rather than expanding upon them amid a counterintuitive appreciation by the yen.
Dividend-driven market performance
As investors have attempted to adapt to the historically low interest rate environment this year, U.S. stock returns have been driven largely by dividend-paying sectors. The ongoing search for yield explains the positive correlation between 10-year Treasury yields and the level of outperformance that some of these higher-yielding sectors have achieved. When considered in combination with the possibility of higher U.S. rates before year-end, the rotation into cyclical sectors in recent months seems extreme.
Fixed Income: All eyes on the Fed
Brett Wander, CFA
Chief Investment Officer,
Up until recent weeks, U.S. stocks and bonds hadn't moved all that much this summer, outside of Brexit. The U.S. economy has been mixed, many overseas central banks have continued to buy bonds (hoping to stimulate growth), and all eyes are now on the Fed. With this dynamic in play, fundamentals haven't seemed to matter. So things have been a bit boring from a bond perspective.
Central bank bond purchases
However, by September 8, all this had changed, and things got really interesting, really fast. The ECB announced expectations to maintain, but not increase, its pace of bond purchases. Yields on 10-year Treasuries had hovered around 1.60% for quite some time, but then rose to near 1.70% after the central bank's announcement. Still, yields are a good half-percentage point below where they started the year. Even if 10-year Treasury yields were to rise further, we think that they would be unlikely to move much beyond 2.25% anytime soon.
Don’t bet on a rate hike
The Fed's two-day meeting this week seems unlikely to produce a rate hike. Economic data has been mixed, inflation hasn't hit the Fed's target, and most importantly, the Fed has been talking about moving cautiously of late. So, with a rate hike likely off the table, the focus will turn to any post-meeting messaging regarding rate hike prospects for the rest of this year.