- A new market cycle has begun and investors who don’t realize it may be in for a surprise, said Charles Schwab.
- The company warned that new market leaders are emerging and unaware investors risk a “shark attack” on their portfolios.
- Chief strategist Jeffrey Kleintop says he is bullish on global equities, but bearish on technology stocks.
A major “shark attack” is coming to the stock market — and it means losses for investors who still believe they are still dealing with the old economic and market cycle, according to Charles Schwab’s chief global investment strategist Jeffrey Kleintop.
“The oceans are filled with resources and opportunities, but they also hold risks — like sharks,” Kleintop said in a note Wednesday, warning that markets are heading into a new cycle. Although a recession has not yet been officially declared, Kleintop believes that a recession has started in 2022, which is a problem for investors as indicators indicate that the stock market is entering a new phase.
This is supported by the large gains in international equities in recent weeks. While US equities have outperformed international equities over the past decade, that is starting to change. The MSCI EAFE index shows that equities in Europe, Australia and East Asia are up 6% since the start of the year. Meanwhile, gains on the MSCI USA lag against the MSCI EAFE index.
“Every recession inverts the relative performance of US and international stocks,” said Kleintop — an inversion that could take a bite out of investors’ portfolios if they are unaware of the new leadership in markets, he warned.
The shift could be explained by the fact that financial conditions have reversed from a few years ago. After the COVID-19 pandemic, the government handed out stimulus and the Fed flooded markets with ample liquidity, allowing technology and growth stocks to thrive. But stimulus has largely been spent, economists say, and the Fed is doing everything it can to flush liquidity out of the market as inflation remains sky-high.
“Many investors are trying to determine whether the bear market is over, but they may be missing the shift in leadership that may have already begun,” said Kleintop. “There is a major shark attack underway that could take a major bite out of the portfolios of unprepared investors. Those who have failed to rebalance — by trimming what outperformed and buying what lagged — may be at particular risk,” he warned . that market cycles typically last for years.
Other market commentators have warned that the old investing playbooks won’t work in this market cycle, as the Fed is determined to cut inflation, even if it means increasing volatility in stocks. Bank of America warned that tight financial conditions could cause international stocks to crush U.S. stocks for the first time in 15 years, and analysts have warned technology will continue to face headwinds into 2023.