Jeffrey Kleintop, chief global investment strategist for Charles Schwab, was the featured speaker at our annual Bedel Financial Forum. You may be familiar with Jeffrey. He’s frequently cited in the Wall Street Journal, Barron’s and the Financial Times and is often a guest on CNBC, Bloomberg and CNN. When he spoke with us on November 7th, he focused his presentation on the outlook for markets over the short term, intermediate term, and long term and what investors should expect during each period.
The next three to six months
In retrospect, leading up to October the market was likely too far ahead of itself. The negative stock returns in October brought the market back down to where it should be based upon economic data. This reset potentially allows room for the market to grow over the next six months or so. Investors could see nice returns during this period.
The upcoming 12 to 18 months
Jeffrey spent a lot of time discussing concerns around the market looking out 12 to 18 months from now. Based upon some key indicators he sees the potential for a recession in that timeframe. However Jeffrey did state that he doesn’t see this as a recession like 2008-2009 but more of a normal, shallow recession pushing markets down 20% or so instead of the nearly 50% we saw in 2008-2009. What should investors do? Getting out of the stock market is risky according to Jeffrey as historically average returns from the stock market in the 12 months leading up to a recession have been strong. Most world indexes have posted average returns in the double digits for that period. Getting out of stocks too early can result in missing out on significant gains; gains which would help soften the blow from the negative returns of a recession. He believes the best solution for investors is to have a plan in place for cash needs over the next couple of years and to begin rebalancing your portfolio now to take advantage of the long-term trends he sees playing out in the next 5 to 10 years.
The long haul
Jeffrey envisions a more positive outlook with historic opportunities for investors during the next five to 10 years. Here are three areas he believes will outperform over that period:
- U.S. vs international stock. The outperformance of U.S. stocks over international stocks is the widest it has ever been. Jeffrey provided a slide going back to 1970 which showed that, eventually, this spread reverses itself. If this spread-reversal pattern does repeat, expect international stocks to outperform U.S. stocks. To take advantage of this opportunity, investors should rebalance their portfolios, keeping their international stock holdings at their desired weight.
- Growth vs value stocks. Growth stocks have outperformed value stocks significantly over the past several years. Historically, this pattern also reverses itself, as demonstrated by the tech boom/bust of 1998-2002. The gap in outperformance is just now beginning to hit extreme levels and Jeffrey believes this is an opportunity to rebalance gains from growth stocks to value stocks.
- Large vs small cap stocks. Jeffrey showed a chart dating back over 20 years that shows the gap between the outperformance of international small cap stocks over international large cap stocks is approaching the widest it has ever been. As with the other trends mentioned above, he sees this reversing itself with large cap international stocks outperforming international small cap stocks.
Our audience had many good questions for Jeffrey. The big one:
"What should we do, based upon your expectations?"
Jeffrey stated that most investors would think getting out of the market is the best solution. However, he discouraged that as he stated:
“Getting out of the market is two decisions, first when to get out, the second is when to get back in. There is no chart or data point I can give you that will answer that second question.”
He believed that investors should work with their advisor to have a plan to get through the intermediate period by having bonds and/or cash available to cover known cash needs. They should also start thinking about rebalancing their portfolios to take advantage of the long-term trends he sees playing out.
As clients of Bedel Financial, we have worked closely with you to create the appropriate customized portfolio based upon your current and future financial needs. We are continuously reviewing and rebalancing your holdings, as Jeff has suggested, in order to ensure you are always protected from a downturn and positioned to benefit from upturns. Our primary objective is to allow you to enjoy life without the stress and worry of market changes.
Up Next: Kilimanjaro or Bust! - By: Bill Wendling, CFA
Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.
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