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Are Investors Underestimating the Stock Market Rally?

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RANDY FREDERICK: Despite escalated tensions with North Korea, hurricanes, higher interest rates, and now a strengthening dollar, this market continues to hit new highs almost daily. Jeff Kleintop joins me for the October 3rd Schwab Market Snapshot to give us his take on how this market can continue to go higher despite all these hurdles.

So, Jeff, as we move into Q4, the market shows no signs of giving up. Breadth is really good and stocks just keep on climbing. Is it possible that investors are underestimating this market?

JEFF KLEINTOP: Well, investors have been cautiously buying stocks this year, but, you’re right, it’s easy to underestimate this rally. Both from the breadth of the countries and the consistency of it—every major country has posted gains this year. That’s pretty rare. And every month this year, we’ve seen gains for global stocks.

Through September, the MSCI All-Country World Index posted gains every month. And, in fact, the last two months of last year were positive, as well. So now let’s string that together, that’s 11 months in a row of gains, tying the all-time record set back in 2003 and 2004. So it’s been an impressive streak, to say the least.

RANDY: I would agree. And, as you just said, not only is this going on in the U.S., but globally. So do you see anything that could derail this rally?

JEFF: Well, of course, a pullback could come at any time. But a development big enough to overcome the improvement in earnings and economic growth supporting the gains, well, I guess it could come in the form of the issue of inflation. So central banks right now around the world are behaving as if wages and inflation will revive in the year ahead. And if they don’t and central banks don’t alter their policy path, stocks could be in for a rough ride in 2018.

See, the past three recessions, Randy, as you know, were all caused by the bursting of bubbles. You had the financial crisis caused by the bursting of the housing bubble. You had the tech-wreck in the early 2000s from the bursting of the tech bubble. And then you had the widespread failures of the savings and loan crisis which preceded the 1990 recession. But unlike the past few recessions, the next one may end up looking like those of the 1960s, ’70s, and ’80s, and those were generally caused by aggressive rate hikes.

Now, the U.S. Fed has started to undertake some rate hikes, and we’ve also seen the Bank of England start to consider rate hikes, as well, and the European Central Bank is starting to taper their quantitative easing program. So we’ve seen this broad shift in actions by central banks in anticipation of higher inflation brought on by more competitive labor markets.

Now, some countries have seen tight labor markets for years now, like in the U.S. or Japan, and that hasn’t led to higher wages or inflation, but we’re only now, globally, at a point where the global unemployment rate is at a level where we’ve seen inflation started to pick up in the past.

So we expect central banks may get this issue of inflation right for 2018—or at least mostly right—leading to gradually higher interest rates, or monetary policy, higher rates, tighter policy, but that doesn’t derail the bull market, or disrupt economic or earnings growth. But, look, a lot is riding on it, and we’ll certainly be watching it very closely.

RANDY: Yeah, I think there’s no question about that. Great information, Jeff. Thank you.

Listen, if you want to read more from Jeff you can do that in the Insights & Ideas section of Schwab.com. You can follow Jeff on Twitter @JeffreyKleintop. And, of course, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Definitions

The MSCI All Country World Index (ACWI) offers a modern, seamless, and fully integrated approach to measuring the full equity opportunity set with no gaps or overlaps. MSCI ACWI represents the Modern Index Strategy and captures all sources of equity returns in 23 developed and 23 emerging markets.

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