At Schwab Impact 2018, over 2,000 RIAs gather for what is one of the industry’s top annual events. I have been going to Impact for many years, and have had opportunities to meet and network with many leaders in the industry, to the likes of Malcolm Gladwell, Ben Bernanke, and Ian Bremmer. This session had former Fed Chair Janet Yellen. I thought I’d share some points from the opening session by three of my favorite speakers, Jeff Klientop and Liz Ann Sonders of Schwab, and Greg Valliere of Horizon Investments. You’ve probably seen them all on CNN or CNBC. They offered some interesting insights.
Jeff Kleintop: Global view. Jeff broke the future into three parts: the immediate 3-6 months, which he called the ‘bounce’; the next 6-18 months, which he characterized as the ‘cycle peak’, and the 5-10 horizon, which Jeff suggests is a long-term turning point.
- For the next three months, the current correction seems to potentially have its requisite effects. Emerging markets are battered, down 20%, and the average drawdown for emerging markets is 21.5%. At this juncture, the dollar’s rise may have abated temporarily. Jeff suggested we may see a typical post-election bounce.
- For the intermediate term, 6-18 months, Jeff posed that we are looking at the end of a cycle and the next bear market, defined as a 20% decline or more. Jeff showed some compelling evidence that every time the unemployment rate was equal to the inflation rate, a recession followed. Jeff shared our view that the current labor market was inflationary, with more jobs than jobless people. Jeff also shared our view that this is likely an ordinary bear market, and no looming crisis is the trigger (for now).
- For the longer term, Jeff had some great data on the reversal of three trends, all of which have had historical ‘legs,’ and all of which tend to reverse at the end of a cycle. These were:
- The reversal of US/EAFE (US market to foreign). The US markets and the foreign markets ‘trade places’ as leaders on a periodic basis. Jeff indicated this was the widest gap in US/EAFE in recent history. He suggested long-term, that foreign markets may show dominance.
- The reversal of growth/value. For the last 6-8 years, most of market gain (including most of 2018) was driven by the monster tech stocks, which are growth. Jeff pointed out after and during a reversal, value stocks (ones with higher dividends and book value) outperform for most historical periods.
- The reversal of small cap. Small cap stocks have led for 10 years. As we go into a recession, and credit gets tighter, small caps suffer more.
- Jeff left the conversation with the ideas to watch for the 2 year/10 year treasury spread to go to zero and for the inflation rate to equal the unemployment rate. To him, that is the barometric pressure of a recession. We tend to agree.
Liz Ann Sonders. Domestic view. I love seeing and hearing Liz Ann. She started with a quote that ‘better or worse matters more than good or bad.’ I think that is a great point. Liz was in Jeff’s camp that we have all the signs of heading into a recession. She pointed out the Leading indicators are weakening, particularly the workweek, new orders, building permits and the S&P 500. She shared that the Fed Recession Probability Model also followed Jeff’s view on interest rates (when short term rates get higher than long term, it’s a sign). Liz Ann also pointed out that the peak in consumer confidence precedes stock market declines, and there is no indication of the peak yet. Liz Ann also observed the following:
- The ‘Smart Money/Dumb Money’ ratio is a high disparity. The ‘Smart Money’ are institutional traders and hedge funds, and the ‘Dumb Money’ are small retail investors. Right now they are quite opposed.
- Mid-term elections have bigger drawdowns and bigger bounce-backs. The average drawdown in a mid-term is 17%, with the average ‘bounce’ at 32%. This follows Jeff’s idea that we have respite temporarily.
- She thought this current cycle is ending, but we have a temporary reprieve.
Greg Valliere. Political view. Greg is one of my favorite speakers and has become a friend as well. Greg’s view of politics is insightful and broad. Here are some of the points from Greg:
- This is the nastiest political climate Greg has ever seen. Both parties are polarized and there is no center anymore. The election won’t change that.
- Greg thinks the Democrats will get the 23 seats they need, and suggests they may get 30 seats. He thinks the Senate will stay GOP, and they may get 1-2 more seats.
- With gridlock, no major changes will take place, with the possible exception of infrastructure. The President has full veto power and will use or wield it.
- Impeachment is very unlikely, barring some bombshell. Mueller will not go away: he is a Marine officer, a Bronze Star and Purple Heart recipient, and one tough fighter.
- If the election were held today, the President would be re-elected.
My overview from these comments: A lot of what we thought and what we are preparing for. Time to plan!