Why short-lived stocks have become a “main theme,” according to the strategist

Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab, joins Yahoo Finance Live to discuss some of the biggest issues in the markets and why bond markets have been so volatile.

video transcript

–Live, we want to talk about what exactly is causing this sell-off. And for that, we want to bring in Jeffrey Kleintop. He is the chief global investment strategist for Charles Schwab.

I guess when you take a look at today’s massive reversal, it’s a totally different story than what we were talking about yesterday at this point. What’s behind today’s crash?

Well, you call it a u-turn, and that’s a good way to describe it. Yesterday, I think the market got a sense of relief that maybe Powell took 75 bps off the table for further rate hikes, suggesting the Fed could take a more dovish path.

But you know, today I think the market is acknowledging that there are risks associated with that, maybe higher inflation. And that’s certainly what we’re seeing here with yields going up.

And for me, this is an enduring theme. This is not just a phenomenon. Yes, bond yields are definitely up over 3% today for the first time, but if you look back to August 2020 when the 10-year bond was at 1.5%, there has been a major theme in the markets. And it is that short duration stocks, i.e. low priced for cash flow, have outperformed high or longer duration stocks, or high priced cash flow stocks, day in and day out. day, month after month.

And that’s a trend that’s going to continue here. So I think investors should increasingly look at this in their portfolios as a way to hedge against some of these really vicious declines.

What are some of the questions you’re hearing from customers in this type of environment?

JEFFREY KLEINTOP: Well, there’s everything from how can I protect myself from rising interest rates, to suggesting shorter duration stocks. But the other questions are fine, what about a recession, or what about a tech crash similar to 2000 to 2001 and that short recession, but very painful path for tech stocks?

And I think one of the things we can look for is diversification. I know that people often talk about diversification as an abstract concept, but now it is bearing more fruit than we have seen in the last 10 years. Sectors, stocks, countries are moving in opposite directions. I just noted that the UK stock market rallied today as the BOE raised rates. The point is that different parts of the market are moving in different directions, and that is paying off in terms of muting volatility in your portfolio.

If you’re just in some tech names, if you’re just in the energy sector, if you’re just holding on to Bitcoin or something like that, you’re seeing saw volatility. But if you’re diversified across many different sectors, countries, asset classes, that diversification is paying off in a way that we haven’t seen in a long time. That is a key message for investors.

Jeff, we heard that the Fed laid out its plan to raise interest rates by 50 basis points. There was some speculation as to whether or not we might see a 75 basis point increase in the future. Jay Powell said yesterday that as of now, the Fed is not considering it. What did you think of the Fed’s plan? Are they making the right move?

JEFFREY KLEINTOP: Well, I think the Fed has to have a lot of credibility here around their short-term inflation-fighting credentials, because they’ve lost a lot. But I think being a little more flexible in the long run, I still think that there are members of the Fed who believe that part of this element of inflation is transitory, and the Fed forecast is that inflation will come down in the second half of this anus. .

I think what’s interesting is when we get to the end of the summer. Basically, Powell telegraphed two 50 basis point moves at the June and July meeting. But we have a big gap between July and September.

And the Bank of England just raised rates for the fourth time in a row. But what was really interesting is that they’re going through what the Fed may be going through this summer, let’s say around Jackson Hole time in August. Because two members of the Bank of England said they don’t necessarily need to walk more. I think three members voted for another 25 basis point rate increase after today, and others felt that 50 would have been the right move for today.

So they’re starting to see this divergence of opinion, and we’re not sure which way they’re going to go in the future. I think the Fed could be going through that crisis of real divergence among its members later this fall.

We will see if markets are happy that inflation has subsided by then, and that could be good news, or if they still feel inflation is a problem, even as the Fed begins to question their path. And that could lead to even higher interest rates and a more favorable environment for short-duration stocks.

And it’s interesting, because you mentioned in your notes that international stocks had a strong April, outperforming US stocks. But then when he sees these central banks moving in different directions or as he mentioned it foreshadows what the Fed can expect based on what the BOE is doing. What should people be looking at in terms of international stocks or international markets that might be a good place to be right now?

JEFFREY KLEINTOP: That’s a great question. International markets have outperformed; again, in April they outperformed by the second-widest margin in 20 years. And this is partly because we have a lot more short duration stocks.

I mentioned that the UK market was up today. In part, yes, many energy and financial commodities make up that index. It is a short-lived market share. That’s when UK stocks rise this year.

So I think looking outside of the US, the US has mostly longer duration stocks: a lot of healthcare, a lot of technology. If you take a look outside of the US, you get a lot more of those shorter duration areas of the market that are really benefiting from the environment that we’re in, not just rising commodity prices, but also by defending higher rates.

So I think investors are looking to diversify away from the US, although yes, there is certainly a possibility of a recession in China. There are certainly war-related pressures in Europe, but their economies are holding up quite well here, and their stock markets are outperforming.

Jeff, let’s bring it back to the US, because some of the biggest movers today (Shopify, Etsy, eBay) are putting down their profit heels. A common theme among those three companies is the fact that online spending, at least e-commerce, appears to be stagnant, even regressing in some areas. How big is this concern and what do you think it tells us? Perhaps the consumer is not as strong as we initially thought?

JEFFREY KLEINTOP: Well, the consumer seems to be backing off a little bit here in terms of their momentum, but maybe that’s not surprising given the reopening that we’ve seen in the US more and more, abroad, where some of these companies are still getting a much of their revenue, we’re seeing solid growth.

In fact, some of the relaxation of omicron restrictions in Europe has actually led to a boom in several of these types of companies. I only point to OpenTable restaurant reservations or box office movie receipts.

Therefore, people dedicate themselves more to the service activity than to the goods activity. And that could be a support for the economy, maybe more overseas than in the US But it’s something we’re not hearing as much about. We focus on perhaps these goods producers in terms of some disappointments. But on the service side, we’re seeing some pretty solid results.

And I don’t want to ask you as we talk about consumer sentiment and consumer spending, at what point do you think we’re going to start seeing this in earnings reports?

JEFFREY KLEINTOP: I think at the end of this year. So we’ve been talking about this shift from scarcity to excess. And I think we’re already starting to see that in terms of inventories, and that’s an early sign that consumer behavior is starting to slow down; not that it’s slow, but it’s starting to slow down, as all the supply chain problems are starting. bring many more products to market. They may not finally resolve, but they don’t get worse. And that has allowed much of this product to flow.

So I think it’s important that when we think about profits, we could go for an environment where a number of companies have ridden this wave of weak demand and pricing power. They could be looking at a very different environment in the second half of this year.

Of course, we have already seen it with some of the actions related to the pandemic: the Pelotons, the Netflixes of the world. But it can really extend to areas even like semiconductors, so it’s something to focus on. Hedging against excesses in the second half of this year may be an important message to investors.

Jeff, we’ll get the job report tomorrow. Obviously, that will probably influence the movement of the market at least tomorrow morning. What do you expect to see?

JEFFREY KLEINTOP: You know, another solid month for work. We are not seeing a decline here in terms of labor demand. The question is, what does it mean for wages?

And so far, we have certainly seen an increase in wages, but perhaps not as much as some might have feared. So that will be the real problem tomorrow. Are we seeing a real rise in wage effects that would alarm the Fed and force it to be even more aggressive going forward?

But you know, I think the overall job count suggests that there’s still a relatively tight job market. It is difficult to find workers there. So you may not be seeing a strong number like you might otherwise if there was a larger pool of labor available.

All right, thank you very much, Jeffrey Kleintrop, Chief Global Investment Strategist at Charles Schwab for your insights. Thank you very much.

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