Charles Schwab Guest Market Perspective: Crossroads

July 29, 2022

Amid signs of slowing growth, the economy has reached a crossroads on key issues: Will we see a recession or a soft landing? Will Russia's scheduled "maintenance" shutdowns of a key natural gas pipeline endure long enough to hurt Europe's economy? Will longer-term Treasury bond yields be more affected by inflation or by slowing economic growth?

We don't know when we'll have the answers, but some clarity may emerge later this month. Second-quarter earnings season begins soon, potentially providing clues about the strength of the economy and how well companies are positioned to deal with it. July developments around the Nord Stream pipeline may tell us more about Europe's access to natural gas later this year. And while another interest rate increase is expected at the Federal Reserve's July 26-27 meeting, markets are looking forward to hearing what Fed Chair Jerome Powell has to say about the economy at his post-meeting news conference.  

U.S. stocks and economy: Moments of truth

Is a recession coming? Economic bulls and bears are debating whether the data point to slower but continued growth (a "soft landing," to use the Federal Reserve's terminology), or a recession. 

The state of the job market is a battleground in this debate. The bulls cheered the June U.S. employment report. The economy added 372,000 jobs and the unemployment rate was at a low and steady 3.6%.  

However, the picture changes if you look at the leading job market indicators, which historically have previewed coming economic trends. For example, at turning points in the economic cycle, the monthly employment report’s "household survey"—which includes agricultural, self-employed, and private household workers that aren’t included in the main employment data—tends to be increasingly important. 

As you can see in the chart below, the household survey has fallen much more sharply than the still-strong nonfarm payroll survey over the past three months. The drop in the leading measure doesn't necessarily prove that payrolls are peaking, but if they are, it would be consistent with prior instances in which the household survey previewed overall weakness.

Diverging payrolls

Source: Charles Schwab, Bureau of Labor Statistics, as of 6/30/2022. Y-axis is truncated at 3,000 and -3,000 to account for pandemic-related distortions.

Other leading job market indicators, such as weekly initial jobless claims and layoff announcements, also suggest the job market is softening. Meanwhile, consumer and business confidence are suffering in the face of tighter monetary policy, faster inflation, and slower growth, reflecting the weakness in financial markets and the outlook for corporate profit margins. Because labor is often the largest cost for companies, creating more new jobs could prove challenging. 

At the same time, stock prices and corporate profits have become more correlated in recent years. That doesn't necessarily mean a drop in share prices automatically portends lower profits, but it's worth watching the relationship. 

Better (or worse) together

Source: Charles Schwab, Bloomberg, as of 6/30/2022.

Note: Correlation is a statistical measure of how two investments historically have moved in relation to each other, and ranges from -1 to +1. A correlation of 1 indicates a perfect positive correlation, while a correlation of -1 indicates a perfect negative correlation. A correlation of zero means the assets are not correlated.  Past performance is no guarantee of future results.

Company fundamentals are always critical, and the coming corporate earnings season is likely to provide some moments of truth for the market. Hopefully, managers' economic outlooks and forward earnings guidance will provide a clear sense of how well companies are positioned in this challenging economic environment. 

One measure to watch for signs of weakening will be forward estimated operating margins. As you can see in the chart below, margins are off their recent highs but have largely trended sideways this year. A significant decline in margins would be consistent with prior market selloffs. Should that occur this year, we think it may be the catalyst for stocks' next move lower. 

Operating margins on edge

Source: Charles Schwab, Bloomberg, as of 7/8/2022.  Past performance is no guarantee of future results.

  Global stocks and economy: Europe's big risk

Although Russia's invasion of Ukraine didn't immediately stifle European economic activity, the threat of a cutoff of Russian energy supplies to Europe remains an important economic risk. Europe's inventories of natural gas had been building at a typical pace for this time of year, after dropping to very low levels this past winter. As of July 9, storage was 62% full and on track to achieve a target of 90% by November, when winter heating demand typically begins.

Natural gas inventory had rebounded to average for this time of year

Source: Charles Schwab, Bloomberg data as of 7/11/2022.

On June 14, Russia's Gazprom cut natural gas delivery to Europe via Nord Stream, a pipeline running under the Baltic Sea, by 60%. This was purportedly to allow for maintenance work, to be followed by a scheduled interruption of supplies for 10 days starting July 11. 

Officials in Germany, the country most dependent upon these flows, have expressed concern that gas deliveries may not return to normal levels after these interruptions, or that they might not return at all. In response to Gazprom's declaration, the German government raised the risk level in its national gas emergency plan to the second highest "alarm" phase, signaling disruptions but continued supply. They also announced the restarting of coal-fired power plants to conserve natural gas. Initiatives to ration energy, which would have considerable economic consequences, have yet to be announced. Direct restrictions on the use of natural gas kick in at the third and highest alarm level. Severe supply disruptions would have broad implications across Europe as Germany is an important gas hub for Europe, re-exporting on average more than 40% of its imports to neighboring countries.

If supply cuts are sustained, or worsened, and alternative sources can’t make up the gap, some rationing of gas may be necessary to reach the 90% storage target by November 1 and avoid a winter heating crisis. Additionally, because about 15% of German power is generated by natural gas (based on 2021 figures) and 40% of that supply typically comes from Russia, there is risk to about 6% of total electrical power generation.

Germany's power production by source

Source: Charles Schwab, Macrobond, Arbeitsgemeinschaft Energiebilanzen e.V. as of 6/29/2022.

If Nord Stream gas flows resume at a normal pace, the 90% target could be reached by reactivating some coal power plants and increasing imports of liquified natural gas from other nations. Rationing could be avoided.

If Nord Stream gas flows resume at only 40%, some economic impact may be felt. Germany's economy minister has said that any energy cuts would be targeted first at businesses rather than consumers. These might be direct users of natural gas such as the chemical and metal industries, which could slow economic output and potentially create supply-chain drags. Alternatively, reducing gas-powered electricity production by 2%-3% of total power generation and diverting those supplies to storage to reach the November target may be necessary. This has potential negative impacts to output for the large German automotive, mechanical, and electrical manufacturers reliant on a stable electricity supply.

In the worst-case scenario, if Nord Stream gas flows permanently cease in July, natural gas storage targets may not be achievable before winter. Deeper cuts totaling 6% of total electricity production might be needed to avoid a heating crisis, with greater impacts to industry and households. The German government would likely seek to lower demand by allowing natural gas prices to rise sharply, risking rising inflation and a recession. We will be monitoring Europe's access to natural gas closely as the July developments unfold.

  Fixed income: Caught in the middle

Bond yields are caught between the prospects for inflation and recession. After surging to nearly 3.5% in mid-June when the Consumer Price Index (CPI) hit a 40-year high of 8.6%, 10-year Treasury yields have been trading in a volatile range around the 3% level. We expect the volatility to continue for the next few months. However, we believe that the impact of slowing growth and/or recession risk likely will drive long term yields, outweighing inflation concerns in the second half of the year. 

With the Federal Reserve focused squarely on bringing down inflation, more rate hikes are likely in the second half of the year. We expect a 75-basis-point  increase in the target range for the federal funds rate in July, and another 50-basis-point hike in September. At that point, the upper bound of the federal funds rate would be 3%, above the Fed's estimated neutral rate (that is, where policy is neither so easy that it risks inflation, nor so tight that it risks slower growth). 

Because inflation is running far above the Fed's 2% target, it would make sense to move rates above neutral to get to a more "restrictive" policy. What we don't know yet is how restrictive policy will be. It's worth remembering that in addition to rate hikes, the Fed is also tightening policy by allowing its balance sheet to shrink. In other words, Treasury securities held by the Fed are being allowed to mature without the Fed reinvesting the proceeds (a strategy called quantitative tightening, or QT). Using QT should mean that the peak in the federal funds rate is lower than it would be if the Fed were relying on rate hikes alone to cool inflation.

The Fed's aggressive tightening risks tipping the economy into recession. Gross domestic product (GDP) growth was negative in the first quarter, and likely weak in the second quarter. Leading indicators of growth, such as housing activity, new business orders, and consumer spending all have turned lower in the past few months. Global growth is also slowing due to the impact on Europe of the Russia-Ukraine war, and China's stop-and-start COVID restrictions. Leading indicators suggest much slower growth in the world's major economies over the next six to 12 months.

OECD leading indicators for major economies

Source: Organisation for Economic Co-operation and Development (OECD), as of June 2022.

Note: The OECD's work is based on continued monitoring of events in member countries as well as outside OECD area and includes regular projections of short and medium-term economic developments. Y-axis truncated at 95 for scaling purposes. For reference, 2020 low for the United States is 92.3, OECD - Europe is 89.0, and China is 82.9.

Market-based readings on inflation expectations indicate more concern about growth prospects than about ongoing high inflation. Five and 10-year inflation expectations embedded in the Treasury Inflation-Protected Securities (TIPS) market have retreated to the 2.5% level. 

TIPS breakeven levels are signaling lower long-term inflation expectations

Source: Bloomberg.
U.S. Breakeven 10 Year (USGGBE10 Index) and U.S. Breakeven 5 Year (USGGBE05 Index). Daily data as of 7/13/2022 The breakeven rate is the difference between the TIPS rate and the comparable-maturity Treasury rate and is used as a gauge for what market participants believe inflation will be five or 10 years in the future.

The outcome of running a tight monetary policy in a slowing-growth environment is likely to be further flattening or inversion of the yield curve, underperformance of riskier segments of the bond market and a stronger dollar. The yield spread between two- and 10-year Treasuries is already inverted, which in the past has been a signal of a potential recession.  

The spread between 2- and 10-year Treasuries has narrowed

Source: Bloomberg. 
U.S. Generic 10-year Treasury Yield (USGG10YR INDEX). Daily data as of 7/13/2022.

Riskier segments of the bond market likely will struggle relative to Treasuries in the second half of the year. In the corporate bond market, yields on sub-investment-grade, or high-yield, bonds have been rising faster than Treasury yields. These bonds tend to be more sensitive to economic growth, with a higher risk of default in a rising-rate/slowing-growth environment. 

Emerging-market bonds are underperforming Treasuries and developed-market bonds due to the combination of slowing global growth and a strong U.S. dollar. Many of the issuers have high amounts of dollar-denominated debt that is now more difficult to service, with their currencies declining versus the dollar. We see the dollar continuing to stay strong until there is more confidence that the Fed's rate hikes have reached peak levels.

The U.S. dollar has strengthened 

Source: Bloomberg.
Bloomberg Dollar Spot Index (BBDXY Index). Daily data as of 7/13/2022.  Past performance is no guarantee of future results.

As the tug-of-war between inflation and recession fears plays out in the second half of the year, we expect to see continued high volatility in the bond market, but also believe there is a good chance that the cyclical high in intermediate to long-term yields may have been reached. We suggest investors focus on staying in higher-rated bonds and gradually add duration  to portfolios in anticipation of lower yields by year-end.

 

 

Patience Over Panic: Interpreting Today’s Fed Decision

January 28, 2026
The Federal Reserve concluded its meeting today by leaving interest rates unchanged, maintaining the current policy range as it continues to assess the evolving economic landscape. This decision reflects a deliberate pause after recent policy adjustments and underscores the Fed’s ongoing effort to balance progress on inflation with signs of moderation in economic growth. In its statement, the Federal Open Market Committee acknowledged that inflation has continued to ease from prior peaks, though it remains above the Fed’s longer-term objective. At the same time, economic activity has shown resilience. Consumer spending has held up, business investment remains uneven but stable, and labor market conditions, while cooling from earlier strength, continue to reflect solid underlying demand for workers. Wage growth has moderated, but employment levels remain elevated relative to historical norms. The Fed’s decision to hold rates steady signals a desire for greater clarity before making additional policy moves. Policymakers have emphasized that future decisions will be driven by incoming data rather than a predetermined path. This approach reflects the complexity of the current environment, where encouraging inflation trends coexist with pockets of economic strength that could slow further progress if policy is eased too quickly. For the broader economy, a steady policy stance provides near-term predictability. Borrowing costs remain elevated compared to the prior decade, but the absence of additional tightening reduces the risk of an abrupt slowdown. Households and businesses continue to adapt to higher rates, and the Fed appears focused on avoiding unnecessary pressure that could undermine growth while inflation is already moving in the right direction. From a market perspective, today’s decision reinforces a theme investors have been grappling with for months: patience. Markets have spent much of the past year adjusting expectations around the timing and pace of potential rate cuts. The Fed’s message suggests that while easing may occur in the future, it is unlikely to happen rapidly or without clear evidence that inflation is sustainably under control. As a result, market movements are likely to remain sensitive to economic data, particularly inflation reports, employment figures, and indicators of consumer demand. Importantly, the Fed also reaffirmed its commitment to maintaining restrictive policy until it is confident that price stability has been restored. This reinforces the idea that the central bank is prioritizing long-term economic health over short-term market comfort. While this stance can introduce periods of volatility, it also supports the foundation for more durable growth over time. Looking ahead, the economic outlook remains constructive but uneven. Growth is expected to continue at a more moderate pace, with cooling inflation and stable employment supporting consumer activity. At the same time, higher financing costs and tighter credit conditions may weigh on certain sectors, particularly those that benefited from ultra-low rates in prior years. This divergence underscores the importance of diversification and discipline within investment strategies. At Affinity Capital, we view today’s decision as consistent with a broader transition toward a more normalized economic environment. The era of emergency-level policy is firmly behind us, and the path forward is likely to involve incremental adjustments rather than dramatic shifts. Periods like this often reward investors who remain focused on long-term objectives, risk management, and thoughtful portfolio construction rather than short-term headlines. As always, we will continue to monitor economic developments closely and assess how changes in monetary policy may impact portfolios and financial plans. While uncertainty remains a constant in markets, a measured and intentional approach continues to be the most reliable way to navigate it.

Markets, Geopolitics, and Recent Volatility

January 21, 2026
Recent market headlines have been driven less by economic data and more by geopolitics. In particular, renewed discussion around Greenland and its strategic importance has introduced a new layer of uncertainty into global markets. Greenland matters not because of its size or population, but because of its location and resources. It sits at a critical crossroads between North America and Europe, plays an increasingly important role in Arctic shipping routes, and holds significant reserves of rare earth minerals that are essential for technology, defense systems, and energy infrastructure. As global competition for these resources intensifies, Greenland has become a focal point in broader strategic and trade discussions. Markets reacted quickly to this uncertainty. U.S. stock indexes moved lower in a broad selloff, with technology shares leading the decline. At the same time, investors shifted toward more defensive assets, pushing volatility higher, lifting gold prices, and pressuring risk-oriented assets such as cryptocurrencies. Similar caution was reflected in overseas markets as well. When geopolitical issues intersect with trade policy, markets tend to respond swiftly. Even the possibility of changes in tariffs, trade relationships, or diplomatic alignment can influence assumptions about global supply chains, corporate earnings, and economic growth. That is what markets have been digesting. These developments are now a regular part of the global environment. Markets today must absorb not only interest rates and earnings reports, but also geopolitical strategy, resource security, and shifting alliances. This can create short-term market adjustments as investors reassess expectations. Geopolitical uncertainty does not automatically translate into lasting economic damage. Markets have navigated trade disputes, diplomatic standoffs, and strategic realignments many times before. Over time, clarity emerges, negotiations evolve, and economic activity adapts. We continue to watch these developments closely and view them as part of the broader global backdrop in which markets operate. While the headlines may feel new, the underlying dynamic of markets responding to geopolitical uncertainty is familiar and expected. If you have questions about how global events fit into the bigger picture, we are always available to talk them through. Understanding the context behind the headlines is often the most effective way to stay grounded when markets react to evolving global issues.

The Policy Pivot: Key Takeaways for Investors

December 11, 2025
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