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U.S. Economic Confusion may be Contributing to Investor Skepticism

A bit of volatility returned to Wall Street, with indexes pulling back from record highs and the leading sector performer to this point in the year, technology, experiencing a decent-sized pullback. Meanwhile, we've seen a flattening of the yield curve, which suggests the bond and stock markets may be sending conflicting economic signals.

We believe the pullback in both tech and the overall market was healthy and served to correct some overly optimistic sentiment conditions. But temper your enthusiasm for a sharp rebound like we’ve seen in the past. The new variable in the equation is a Fed that is more hawkish than the market in terms of the expected trajectory of rate hikes. This has raised concerns over a possible monetary mistake, given lower inflation. Additionally, valuations are stretched; albeit on stronger earnings growth expected for this and next year. We continue to believe that strong earnings growth, a solid economy, still-low interest rates, and ample global liquidity support current valuations; but urge investors to remain disciplined around strategic asset allocations.

Confusing Economy

The U.S. economic picture has been mixed. On the plus side, bank loans have started to show signs of ticking higher, which could indicate greater carry through of improved business confidence to action; as supported by the National Federation of Independent Business (NFIB) survey's optimism reading of a strong 104.5.  Additionally, a survey conducted by Evercore ISI Research shows that 30% of companies plan to increase capital spending in 2017, up from just 9% in November of last year.

Housing also continues to look solid. The National Association of Homebuilders (NAHB) Survey remained elevated at 67 (a level of 50 is the demarcation point between improvement and deterioration), while mortgage applications have also increased.

And the labor market continues to be quite tight, with the unemployment rate at 4.3%,  the leading indicator of jobless claims continuing to be near historic lows, and job openings (via the Job Openings and Labor Turnover Survey, or JOLTS) at an all-time record high.

But not all is rosy. Commodity prices have fallen—notably oil prices—indicating higher supplies and/or soft demand. And the most recent retail sales report from the Census Bureau was disappointing, with a flat reading ex-autos and gas; although the previous couple of months were revised higher.

We believe lower commodity prices are likely more a consequence of increased supply rather than something overly concerning on the demand side. And today's "smarter" consumer is not tying spending to increased debt, which should prevent a boom/bust cycle; and is spending more on experiences than goods.

Important Disclosure
This material is issued by Charles Schwab, Hong Kong, Ltd. The information provided here is for general informational purposes only and has not been reviewed by the Securities and Futures Commission in Hong Kong.

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Content provided by Charles Schwab, Hong Kong
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