RANDY FREDERICK: After six weeks of mostly sideways-moving markets, volatility is definitely back. Jeff Kleintop, Schwab’s chief global investment strategist, joins me for the September 13 Schwab Market Snapshot to discuss exactly what it was that sparked this transition from calm to storm. Welcome back, Jeff.
JEFF KLEINTOP: Thanks, great to be here, Randy.
RANDY: So, Jeff, it’s no secret that we’ve been cautioning investors for quite a while now that, after an unusually quiet August, September and October could live up to their well-deserved reputations for high volatility. And, sure enough, on Friday, September 9 stocks tumbled and volatility spiked. So from your perspective, what were the primary causes of last Friday’s sell-off?
JEFF: Well, the uncertainty over the next action by the Fed and other central banks certainly was a catalyst for Friday’s move. And the outlook for oil supply from the International Energy Agency is rattling stocks today. But I think the buildup of uncertainty over the upcoming election, over some of the mixed economic reports that we’ve seen, and the fact that analysts’ earnings expectations may have gotten a little bit too optimistic, created a fragile backdrop for stocks, and then the jitters over the Fed and oil prices sparked sell-off.
RANDY: Well, Jeff, when you and I recorded our last Market Snapshot, you mentioned that corporate earnings had been finally rising after several years of cuts by analysts. And since that’s still the case, it seems like that should be stimulative, but now it sounds like you’re saying that maybe that’s at least partially responsible for this fragile backdrop that you’re talking about.
JEFF: Yeah, it seems like good news. For a year and a half, we saw estimates decline for earnings growth. Finally, since February, we’ve started to see earnings on the rise again, that’s for the stocks of the MSCI All Country World Index. But the problem is the gap between forward expectations—the growth over the next 12 months—and where they actually are now, is the widest gap we’ve seen since 2009. Analysts are now expecting more than 20% earnings growth over the course of the next 12 months. And, Randy, while that’s not impossible it seems pretty unlikely, given the pace of global economic growth that we’re seeing—kind of below average. So I think that those optimistic expectations left the market vulnerable to a pullback, and so this return of volatility, you’re right, not surprising. But it’s a reminder here—rebalancing’s important, taking a look at your allocation—making sure you rebalance back to your strategic asset allocation targets, probably the smart move here.
RANDY: So just a little bit too much optimism. Now I don’t think investors should be too surprised by this pickup in volatility, but every time that happens then we start to hear these worries that, oh, maybe another bear market is right around the corner. I don’t see it that way, and I don’t think you do, either. What economic data are you watching right now that sort of contradicts this bear market story?
JEFF: Right, so usually bear markets go along with global recessions. And while the risk isn’t a zero of a global recession, it doesn’t look likely. I’d point to the Global Index of Leading Economic Indicators, put out by the OECD—that’s up five months in a row now. And one of the favored indicators I like to watch, the Global Purchasing Manager’s Index, the Global Composite PMI, that’s now up three months in a row. So economic growth is low on a level basis, but it’s been improving, so the change is going in the right direction. It doesn’t look like a recession’s right around the corner, even over the next 12 months or so, so I’d say that looks pretty good. I think instead we’re just seeing more lackluster growth, capable of generating modest earnings growth, but not the kind of numbers that analysts are expecting.
RANDY: So even if a bear market isn’t on the horizon, we do think investors probably should continue to expect more volatility in the near-term. So what global catalysts are out there that you’re keeping an eye on, that might be contributing to this volatility pickup in the coming months?
JEFF: Well, in September we’ve got some central bank meetings—both the Fed and the Bank of Japan meet on the 21st—and there’s certainly potential for surprises there. On the political front we’ve got an election here in the U.S., and debates at the end of this month in September. And in October there’s a referendum in Italy that raises concerns about would they leave the EU, all those kinds of issues. And then I guess we’re getting close to the earning season, that’ll be kicking off in about a month from now. And as I said, expectations are a bit high, not necessarily for this quarter, but future guidance could come down a little bit, that could rattle the markets as well. So we could be looking at couple of months of some ups and downs in the stock markets, Randy.
RANDY: Well, that’s about all the time we have, Jeff. Thank you again for sharing your global perspective with us. Listen, if you have questions please call and talk to a Schwab financial professional. You can read more from Jeff in the International Investing Section of Schwab.com. You can follow Jeff on Twitter @JeffreyKleintop, and you can follow me on Twitter @RandyAFrederick. We will be back again. Until next time, invest wisely, own your tomorrow.