Those who assume the recent inversion – and reversal – in the U.S. Treasury yield curve are foreshadowing an oncoming recession might be missing the point, said Jeffrey Kleintop, senior vice president, chief global investment strategist at Charles Schwab.

Instead, the steady decline in long-term rates speaks to pessimism about the prospects for the global economy, Kleintop told advisors Monday evening at the 2019 IMPACT conference in San Diego.

“The hint is actually a long-term one when we get an inversion,” he said. “It says something important about the long term. The market is reassessing its growth outlook, and where expectations were the highest, they’re starting to come down.

With the pessimistic heart of an economist, Kleintop said that though 2019 has been an excellent year for investors, there are some clear signs of weakness.

Kleintop’s comments contrasted from when he addressed advisors at the 2018 IMPACT conference, which occurred amid a fourth quarter downturn. Now, U.S. markets are up nearly 20%, and equity returns have been stronger elsewhere in the developed world.

Nevertheless, he said that advisors should be cautious in the months ahead. “There are a couple of changes in long-term asset classes that are going to catch a lot of investors by surprise,” said he said.

In late 2018, the Federal Open Market Committee was still on a gradual path of increasing interest rates and many investors were wary about a market top.

But on Monday, Kleintop noted that the Fed had made three straight rate cuts and investor sentiment improved significantly – but like the yield curve inversion, investors may misunderstand the role of central banks in today’s economy.

“What’s changed? Has the economy rebounded? Has the trade war been resolved? Have earnings bounced back?” he asked. “The only thing that really changed was that central banks interest rates went from going up to going down, and for investors, it was like ‘problem solved. We got rate cuts, case closed, done deal.’

“Those investors might be watching too many super hero movies,” said Kleintop, who branded central banks ‘Guardians of the Economy,’ a play on Marvel’s popular Guardians of the Galaxy film franchise.

“We’ve got a number of challenges around the world, and central banks don’t have superpowers. They have one power: to ease financial conditions via lowering interest rates,” said Kleintop.

And many central banks are close to running out of ammunition to combat economic weakness with monetary policy. Germany, whose economy is on the cusp of a recession, according to Kleintop, is already offering investors negative interest rates. So low or high interest rates are not the problem that the economy is having.

“The problem started with the trade war and spilled over into the manufacturing secotr and earings,” said Kleintop. “That’s what’s slowing the global economy. It’s not something the ‘Guardians of the Economy’ can address.”

Kleintop pointed towards the OECD’s leading economic indicators index, which indicates that the global economy may be moving towards  slowing or even a recession.

But recession isn’t assured. “Maybe we get a trade deal, a comprehensive one that rolls back the tariffs in place, and Brexit goes smoothly,” said Kleintop. “Maybe the things that slowed the economy begin to reverse. I’m hoping for that.”

Because the global slowdown appears to be synchronized across country, regional and continental lines, Kleintop argued that it can’t be just interest rate policy and issues with one or two economies causing slowing growth globally: It has to be issues like trade and geopolitical uncertainty.

For example, PMI, a measure of manufacturing output, suffered 15 straight months of decline, he said. “That’s the longest stretch in the history of this index, worse than in 2008. This is how it manifested itself: trade slowed down, manufacturing slowed down, so traders pulled back.”

Kleintop also pointed towards leading indicators of global corporate earnings that suggest earnings are now falling, not rising.

Global business leader confidence is also on the decline, said Kleintop. In a global survey of CFOs asking them to predict when the next recession would occur, 70% said that recession would come at some time in 2020 – and 50% of the survey said that the onset of recession would occur during or before the third quarter of 2020 – before the U.S. presidential election.

“Businesses started to pull back, stopped spending on equipment and labor, we had a trade slowdown, a manufacturing slowdown,” he said.

Kleintop conceded that overall, employment numbers looked solid, even in weak economies like Spain’s are showing some impressive job numbers, fueling optimism and consumer confidence.

But Kleintop poked holes in the belief that strong consumer confidence can translate to continued economic growth.

“Consumer confidence is high and that worries me,” he said. “I like it when it is low and rising, not when it is high and starting to dall. I worry that it’s  vulnerable to any kind of pull abck in the the job market. We’ve got to watch that very closely.”

Also, the labor market is a lagging indicator, explained Kleintop. Amid drops in trade and manufacturing, employment numbers may be “the next shoe to drop,” and with them could come consumer confidence.

Beyond 2019, the near-term trajectory of the economy may  depend on the ability of leaders in the U.S. and its major trade partners, China in particular, to hammer out a trade agreement, and a successful resolution to Brexit.

“Will we see a spillover into jobs before we get a trade deal? We’ll be watching the data very closely: This risk is high,” he said, adding that the U.S.’s ability to reach agreements with Japan and South Korea and positive progress on a trade agreement with Mexico and Canada give some reason for optimism.

As for those inverting yield curves?

Kleintop said that in addition to being a common harbinger of recession,  a yield curve inversion also predicts a cyclical change in equity market between growth and value. After outperforming value stocks for most of the bull market, growth is more likely to underperform moving forward.

“Over the next cycle, value stocks are the place to be – until the next yield curve inversion,” he said. “Over the last few moths we’ve started to see value outperform. It’s portrayed in the financial media as a blip, but I think it’s for real.”