Equities have finally reconnected with economic realities, Jeffrey Kleintop told attendees at Schwab Impact in Washington yesterday. Even though global GDP is expanding at a 3.7 percent rate, economies around the world may have peaked, Schwab's chief international investment strategist told advisors.
There are a number of threats to global growth, "some of them emanating from this city," Kleintop said.
Corporate tax cuts started to be priced into the financial markets in late 2016. That didn't just occur in the United States.
France, Japan and the United Kingdom have also implemented corporate tax cuts. "This year we are paying the price," he said. Corporate profits in the U.S. are rising 20 percent in 2018 and expected to rise only 10 percent next year.
Over the next three to six months, Kleintop said he thought U.S. stocks might rally off the near-10 percent correction (depending on which index you look at) that they have suffered in October. But over the intermediate term of 6 to 18 months, "we could be headed into the next bear market."
When the unemployment rate is equal to the inflation rate, that's the "sign of a recession," he said. At present, the gap is in the 1.5 to 1.9 area, which indicates a peak in the cycle.
Another indicator occurs when the gap on the 10-year Treasury bond and 3-month Treasury bill hits zero. Right now it's 75 basis points.
"We don't see another financial crisis," he said. But a "garden variety" bear market is a definite possibility.
Following Kleintop, Liz Ann Sonders apologized to attendees who might be hoping for a rosier outlook on the financial markets from her. Instead, she shared many of his concerns.
Sentiment, in the view of Sonders, Schwab's chief investment strategist, had become a problem of its own. Back in January, the levels of optimism rivaled the market euphoria exhibited in 1999 and early 2000. By August, she was detecting "anger and defiance" from investors who didn't want to consider the risks.