Jeffrey Kleintop, Charles Schwab's chief investment strategist, talks about what 2018 holds for equities, investment opportunities, and bitcoin.
Business Insider recently spoke with Jeffrey Kleintop, Charles Schwab's chief investment strategist, about what 2018 holds for equities, investment opportunities, and bitcoin. Schwab manages $320 billion in assets.Kleintop thinks equities can continue to rally in 2018 because of continued earnings growth fueled by the expansion of global economies.He thinks the flattening of yield curves could point to a recession in 2019 or later."The most important thing is to go global," he said when asked where to invest.
Following is a transcript of the interview as aired on "The Bottom Line." It has been edited for clarity.
Sara Silverstein: Equity valuations are by most measures at their all-time highs, and a lot of people are wondering, is this the top? Can they continue higher?
Jeffrey Kleintop: I think 2018 could be a really good year. It'll be the first year of back-to-back, broad global economic growth that we've seen in more than a decade. Every one of the world's 45 largest economies is going to grow next year, very likely. That means further earnings growth. That was the secret to 2017's success. It was really about earnings growth rising every month, pushing stocks higher every month. We could see that again in 2018. The only concern I would have is this: Yield curves are beginning to flatten out a little bit. This usually could be bad news for those high valuations, could point to a recession in 2019 or beyond. So while 2018 looks good, you have to keep on watch.
Silverstein: For 2018, is there anything you're watching that might concern you that could lead to an equity crash?
Kleintop: There are a number of risks. China's economic growth — certainly a potential for a slowdown there could shock the rest of the world. Emerging markets have been a big part of why stocks did so well in 2017.
Natural disasters, geopolitics — all these things that are ever present in the markets could come back to be a risk in 2018, particularly if economic growth begins to slow later in the year. That could create some vulnerabilities we didn't see in 2017, where politics, geopolitics, and the like really couldn’t nudge the markets very much at all.
Chinese President Xi Jinping. (Reuters)
Silverstein: You didn't mention the Fed or inflation at all. You're not worried about the Fed?
Kleintop: Not so much. I think we're actually starting to see a clearer path for inflation. Inflation expectations are beginning to tick up, and that means the personalities at the Fed and other central banks matter less because the data is going to matter more. Currently, the expectations in the market are for the Fed to do two, maybe as many as three rate hikes next year. I think the market is braced for that. I don't think it will be a big risk.
Silverstein: Is there a particular place that you think is a great place to invest?
Kleintop: The most important thing is to go global. Usually, in the last year or two of a business cycle, international stocks tend to outperform US stocks. They’re more cyclical, they're more inflation-sensitive, and valuations look a little bit more attractive, too. But one thing you have to keep in mind is don't concentrate. You want to be broad and really be diversified.
Traders on the floor of the New York Stock Exchange. (Thomson Reuters)
Here's why. Usually we always look for a certain sector or country that's going to do well, but for the first time in 20 years, correlations have come down. Now, this is important, this is how different markets behave relative to each other. So we're seeing the lowest correlations, meaning the best benefit from diversification, in 20 years. You don't want to overlook that. For some investors, this is the best environment for global diversification they've ever seen in their investing careers.
Silverstein: When we talk about high valuations and equities, we're also seeing extremely high valuations in tech. Do you feel differently about tech than the rest of equities?
Kleintop: We still like tech, actually, and I think it's business spending. It needs to pick up in 2018. Tech will benefit from that. Maybe not the consumer side of tech, which has really been where the markets have been focused on. Maybe more the business spending side of technology where the valuations aren’t quite as high but could see more earnings momentum in 2018.
Silverstein: What do you think the impact of tax reform will be for equities in 2018?
Kleintop: The thing about tax reforms is it's not just in the US. We're seeing it everywhere. Many countries have cut corporate taxes in the last few years. The budget in France — they've already proposed some corporate tax cuts for next year. In Japan, they've already put it in the legislation; it's already baked in. They're phasing it in next year. In Germany, the coalition talks are coming around — one of the only things they can agree on is some corporate tax cuts. So we may see that across the board next year. A further lift of profits in 2018 should be good news for investors who continue to be very focused on profit growth.
Silverstein: Is that generally already priced in to global equity prices?
Kleintop: Well, I think there's some optimism about that taking place, but we're not seeing analysts putting it in their estimates yet, and that's key because stocks tracked estimates in 2017.
Silverstein: I have to ask about bitcoin. A lot of people are calling it a bubble. What do you think, and what are your clients asking you about?
Kleintop: I get this question a lot everywhere I go, all around the country, really, all around the world. The big question about bitcoin is, is it a bubble? From the fear of "Did I miss it?" But also "What happens if the bubble bursts?" We know what happened when the dot-com bubble burst. We know what happened when the housing bubble burst. But I think the bitcoin bubble, if you want to call it that, is something different. If prices for bitcoin were to plunge suddenly, because it's so independent from the financial system, it's kind of its own thing. It hasn't yet become embedded in the economy and the financial structure.
