Jeffrey Kleintop, chief global investment strategist at Charles Schwab, takes a look at how the market is performing with news about Fed Chair Jay Powell's renomination, Biden's announcement regarding the oil reserve, and more.

Video Transcript

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- Welcome back. Well, we are just over 15 minutes away from the end of a trading day, and it's been a mixed session. Taking a look at the benchmarks, we can see that the Dow is up by 187 points, near session highs. Goldman one of the outperformers, along with JPMorgan. But the NASDAQ is lower, facing pressure as yields rise. Tech and discretionary are laggards, and Tesla one of the biggest losers. The S&P turning positive, up there by nearly five points. And looking at yields, the 10-year yield also up.

We want to stay on the markets. And let's bring in our market guest, Jeffrey Kleintop, Charles Schwab chief global investment strategist. Jeffrey, thank you so much for your time today. Want to look at mega-caps. They're getting beaten up right now as yields rise. So is it time to get out of them and look elsewhere with a little bit more value, or do we keep riding the-- riding them till the end of the year and beyond?

JEFFREY KLEINTOP: I think seeking a little more value makes some sense. Look, these mega-cap stocks are definitely concentrated in areas like consumer discretionary and technology. They're high-valuation parts of the market. And today might be an example of what we see more of next year, as the Fed moves into a mode of withdrawing liquidity from the markets and ending these pandemic-era policies, perhaps with rate hikes at the end of the year.

And that means higher valuation stocks, well, they tend to not do as well in environments of rising interest rates and tighter financial conditions. So you may want to look to those sectors that are maybe trading closer to their average valuations. I mean, looking to leadership like financials, energy, the areas that are leading the market today, and led for most of this year, might be a good idea.

The only caveat to that is that whenever we see these upticks in COVID cases globally, it tends to see-- it tends to favor those lockdown defensives like technology. So you know, we've been through a bout of that recently. We're not seeing that in the market today, but we have for the last couple of weeks. And to the extent that that lasts through this winter, that could still put some support under these mega-cap stocks. But I think as we look into next year, maybe that COVID wave eases and we see this return to more of a focus on looking for value in a market where earnings growth isn't going to quite be the same thing that we've seen this year.

- Hey, Jeffrey. When we talk about earnings growth, though, I think Schwab's pointed out that 2022 global GDP is expected to still be around 5%, which would be the two-- as you pointed out, two strongest back-to-back years since the 1970s. So as an investor, if I hear something like that, it seems to me-- I'm going to say FOMO, fear of missing out. There could be a melt-up to the upside as inventories have to be rebuilt, and the global economy is going to be on fire.

JEFFREY KLEINTOP: Yeah, well said. And I think there is some pent-up consumer demand. That said, you know, when you take a look at the earnings picture, I happen to believe that we're going to see a lot of these shortages turn into gluts next year. I'm talking about semiconductors, autos, maybe game consoles, phones. And that can really result in maybe a little bit of a weaker outlook for earnings growth. We're only looking right now maybe 5% to 10% for earnings growth for companies in Europe and Asia and the US.

So while yes, I think there could be a little bit more upside here in the near term, I think as we look to the latter part of next year, that growth momentum will be fading. At the same time, price pressure may begin to come back into play and pull down some of those expectations. So I think favoring higher quality companies and those with lower valuations will make sense, particularly as the year goes on.

- And Jeffrey, more broadly speaking, just in terms of some of the catalysts that you're looking towards next year, obviously, yes, the supply chain pressures, if they start to ease, that would be a catalyst here for the market, potentially. But what else do you think has the potential or is likely to push these markets higher?

JEFFREY KLEINTOP: One of the things is green stocks, green tech, alternative energy. This is an area that's not only getting a push here from the Biden administration, but also in Europe with their new Green Deal now being deployed. China is clearly looking to clean up its manufacturing. A lot of fundamental growth in terms of sales and earnings into these companies, along with an increasing interest by investors in these types of companies. So I could see this as a pretty important theme beginning to emerge next year.

In 2020, they did very well, as Biden was leading in the polls, and then kind of a buy the rumor, sell the news this year on some of those-- just we just didn't see them perform particularly well. I think we're starting to see that begin to turn around here in the last month or two. Look for green stocks to do well in international stocks versus the US. Same thing mega-cap versus the rest of the market. The US looks like a mega-cap, tech-dominated index relative to the rest of the world, where valuations are more reasonable. And there are more economically sensitive companies that may benefit more so from the still very high pace of global economic growth in 2022.

- And so speaking about growth, we expect to get some numbers tomorrow. And we are expecting back to back some significant growth. How much of a cushion does that provide against inflation? And do you think we are at peak inflation? Because how much more will consumers take before they say this is enough?

JEFFREY KLEINTOP: Right, we're going to get the University of Michigan data tomorrow, which shows they're already fed up with inflation. I think we're near the peak. We've already seen, you know, we're past the peak of shipping volume and expense. And that's come down. I think if we take a look at some of the major routes for shipping traffic, some of those prices to ship a container unit are down 30% from just six or seven weeks ago. So that's starting to ease.

I think labor pressures are there in terms of wages, but in most cases, unions and minimum wage increases are in line or less than the pace of inflation. So we're not seeing an inflationary spiral there. I think we've probably seen maybe some of the worst in terms of the overall rise in inflation. And that means maybe some relief as we look to next year, in terms of the pace of the Fed hiking interest rates. So yeah, I think hopefully we're past the worst of that. But it could take some time for that to show up and really begin to emerge, maybe not till the second half of next year that we see inflation settle back into a comfort zone for the Fed.

- Jeff, real quickly, do you think that-- we saw what President Biden did today, releasing 50 million barrels from the petroleum reserve. Do you think that the price of oil poses any kind of threat to us in 2022 and the growth predictions?

JEFFREY KLEINTOP: Not where it is right now. I think you'd have to see a much tighter squeeze. And there could be, due to any number of geopolitical or weather-related or other issues. We're not in an abundance of supply right now, and supply lines are already stretched. So if we did have some kind of shock to the system, then I think we'd push oil well over $100, and that could be a risk. But at these levels, I think this is absorbed, given that consumers are seeing their wages increase, their wealth increase, as well. I think they may not like it, but they're able to absorb these prices.