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U.S. Economy Shows Strength as Dow at 4-Year High Nears 13,000: Schwab’s Aguilar

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U.S. economic improvement, housing market stability and strong corporate profits have contributed to the stock market’s solid performance in 2012 as the Dow Jones Industrial Average hits a four-year high, said Charles Schwab’s chief equities investment strategist on Friday.

“It’s an amazing start to 2012,” said strategist Omar Aguilar during an “Every Third Friday” exchange traded funds conference call. “Equity investors seem to be forgetting everything that happened in 2011.”

Since January, the Dow has been nearing the psychologically important benchmark of 13,000 points (on Tuesday, it crossed the barrier before retreating). Last week, the Dow closed near a four-year high as it completed more than a month without any triple-digit declines, for the longest such run in over a year.

In addition to the solid economy, Aguilar pointed to central bank support of Europe along with investors’ search for yield, saying Schwab is maintaining a “cautiously optimistic” stance on stocks. “The search for yield has transitioned to a demand for risky assets,” he said, adding that Europe remains a wild card. “We don’t know the source of outcomes for Europe. That’s the big risk.”

Aguilar added that Schwab recommends emerging markets growth as an offensive play. “It’s the only area that potentially will give us growth rates that we don’t see in the developed world,” he said.

Also on the call, chief fixed income strategist Brett Wander said the current low interest rate environment means that Treasurys are likely to stay in a tight range with a bias toward rising rates.

“Credit markets outside of Treasurys should be interesting to investors,” Wander said, with yields and spreads on corporate credit issuers offering attractive yields around 2% over Treasurys.

ETF Capital Markets Managing Director Eric Pollackov mirrored Wander’s comments on the search for yield, saying that ETF investor concerns revolve around where to find yield. “We’ve noticed close to 38% of ETF flows on the Schwab platform in 2011 came into fixed income,” nearly double 2010 flows.

According to Schwab’s fourth-quarter 2011 investor snapshot, ETF assets have grown 16% in the past 12 months and now account for 39% of the total ETF assets at Schwab. Twelve-month ETF flows were driven primarily by retail investors, who represented 61% of the 2011 flows, while net retail trader flows were negative in 2011, largely due to outflows from international equity, commodity, sector and U.S. equity ETFs.

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