Schwab Market Perspective: Navigating Uncertainty
This month, our experts discuss the difference between betting and investing; the impact of the
Iran war on Treasury yields, interest rates, and inflation; and the potential opportunity in infrastructure investments.
Here are the month's highlights from our experts:
DIY investing? Trading? Professional advice?
U.S. stocks and economy: Betting isn't investing
- A long-term investment strategy means holding claims on productive assets and future cash flows, while gambling products are designed with a negative expected return for participants in the aggregate.
- Casino-like interfaces and prediction-market marketing obscure risk. The data show most participants lose over time, often more than they realize. The true cost is not just the losing bet, it is the compounded future value of the investment that was never made.
- When exploring the key differences between investing vs. gambling, know that in personal finance owning beats hoping and discipline beats speculation, with the long run belonging to those who invest in it.
Fixed income: Iran, inflation, and interest rates
- We expect Federal Reserve policy to stay on hold for several meetings and the 10-year Treasury yield likely to remain in the 4% to 4.5% range over the short run. If oil prices stay elevated for longer and/or inflation expectations rise, yields may rise above that 4.5% upper threshold. Conversely, economic growth prospects would likely need to slow considerably for the 10-year Treasury yield to fall back below 4%.
- Given the elevated inflation risk, we prefer intermediate-term maturities, those in the four- to 10-year range, rather than favoring long-term maturities. Uncertainty around the conflict in the Middle East could pull yields of these investments higher, potentially resulting in lower prices over the short run, however.
- We suggest investors consider focusing on higher-quality bonds, while more aggressive investors can consider preferred securities for added income, recognizing their higher potential volatility and interest rate risk.
International stocks and economy: Increased opportunity for infrastructure investments
- A number of long-term, or secular, drivers are creating potential opportunities for infrastructure operators and builders.
- Infrastructure companies can be both defensive and cyclical in nature. Infrastructure operators feature high barriers to entry and relatively stable growth and dividends, while builder-related companies are seeing opportunities from multi-year capital investment cycles tied to the increased demand for power due to electrification, use of artificial intelligence (AI), and the need to modernize aging infrastructure.
- Infrastructure companies are not without risks, which can include regulatory changes, fluctuations in capital availability, rising input costs, supply-chain disruptions, and raw-material and energy shortages (such as those emanating from the U.S.-Israel war in Iran). Technological changes can also alter the outlook for infrastructure investment.
DIY investing? Trading? Professional advice?
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This material is intended for general informational and educational purposes only. This should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned are not suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.
For illustrative purposes only. Individual situations will vary and are no guarantee of future performance or success and are not intended to be, nor should they be construed as, a recommendation to buy, sell, or continue to hold any investment.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Past performance is no guarantee of future results.
Investing involves risk, including loss of principal.
There are risks associated with investing in dividend paying stocks, including but not limited to the risk that stocks may reduce or stop paying dividends.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.
Preferred securities are a type of hybrid investment that share characteristics of both stock and bonds. They are often callable, meaning the issuing company may redeem the security at a certain price after a certain date. Such call features, and the timing of a call, may affect the security’s yield. Preferred securities generally have lower credit ratings and a lower claim to assets than the issuer's individual bonds. Like bonds, prices of preferred securities tend to move inversely with interest rates, so their prices may fall during periods of rising interest rates. Investment value will fluctuate, and preferred securities, when sold before maturity, may be worth more or less than original cost. Preferred securities are subject to various other risks including changes in interest rates and credit quality, default risks, market valuations, liquidity, prepayments, early redemption, deferral risk, corporate events, tax ramifications, and other factors.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate this risk.
Commodity-related products carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, may be illiquid, and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.
Diversification and asset allocation strategies do not ensure a profit and do not protect against losses in declining markets.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.