← WSJ Your Money Briefing
WSJ Your Money Briefing
2018 Second-Half Outlook: More Market Volatility?
00:09:40
Charles Schwab's Jeff Kleintop outlines stock market expectations for the second half of 2018, including the effect of U.S. tariff threats lobbed against Europe and China.
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Charlie Turner
Access to affordable credit helps me pay
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Jeff Kleintop
my employees, but I don't really need it. Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.
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Jeff Kleintop
This bill would cut the vital resources they need while increasing megastore profits. They deserve it, don't they?
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ReliaQuest Announcer
Tell Congress. Stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.
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Charlie Turner
YOUR Money Briefing Money in Market Stories
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JR Whalen
from the Wall Street Journal.
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Charlie Turner
Welcome. This is Charlie Turner in New York. Does Wall street expect markets to break out of their volatile ways in the second half of 2018? In a moment, JR Whalen speaks with Jeff Kleintop, chief global investment strategist, with Charles Schwab. First, these MONEY headlines. You're in the market to buy a home. No savings, no problem. The Wall Street Journal says there are a growing number of services that help borrowers cobble together the funds to buy homes. These companies, startups and established players in the housing market alike say they're offering options for borrowers who have good credit and income but are struggling to save. For example, there's HomeFundMe, an online site launched by GMC Financial, where users can crowdfund donations. One startup, Loftium, will supply up to $50,000 for a down payment if the home buyer agrees to rent out on Airbnb and share the income. A few organizations, like Unison Agreement and Landed, offer shared equity contracts through which buyers get money for their down payments in exchange for pledging part of the home's future value to investors like pension funds or foundations. And some banks, including bank of America and Morgan Stanley, have programs through which young adults can get a mortgage with nothing down if their parents pledge investment assets as collateral. A big concern by some observers is that programs like these that help borrowers could actually work worsen the housing shortage. The Wall Street Journal's MoneyBeat team says the world is still awash in easy money. A decade after the financial crisis, major central banks are still injecting a heavy dose of stimulus into the global economy. The European Central bank will continue its bond buying program until at least December and could further delay its conclusion. The bank of Japan's program is still firmly in place, and though the US Federal Reserve has trimmed its bond holdings, its balance sheet has only shrunk slightly. All told, the three central banks had balance sheets worth $14.6 trillion at the end of last month, according to Haver analytics. That's up from $13.7 trillion a year earlier. Moneybeat says fast economic growth and stimulative policies are a combination that should support financial markets. But throwing in tax cuts and higher spending, there's also a risk of creating conditions in which the economy gets too hot and could help speed up the Federal Reserve's schedule for raising interest rates. Coming up, J.R. whelan will talk with Jeff Kleintop about what the second half of the year may look like for financial your Money briefing from the Wall Street Journal.
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JR Whalen
Welcome back, everybody. We're at the midpoint of the year, and whether it's consumer confidence, record low unemployment, the threat of tariffs, or the economic health of Europe and Asia, there are myriad factors and moving parts that cause question marks to emerge in terms of what we can expect from the US Economy in the second half of the year. For some answers, we're joined by Charles Schwab, chief global investment strategist Jeff Kleintop. So, Jeff, let's start with the stock market still at historic highs, but we often see dramat swings in response to US Domestic and foreign policy. Should we expect more of the same going forward?
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Jeff Kleintop
The trade issues are clearly the number one risk for the second half. Absent those issues, the economic and earnings picture should look pretty good. We've got a backdrop of broad global economic growth. There are 189 global economies right now, 185 of them are growing, including the US that breadth of growth should be a resilient anchor to help continue to drive earnings growth. Of course, trade presents a pretty significant issue. We see it in some of the PMI data, the purchasing managers indices. We just got them for the month of June. I think it's interesting because the manufacturing components of those indices, for example in Europe or Japan or even the US Continued to slide. Those are export oriented. Yet the domestic service oriented indices actually rose. That just points out to the strength and resiliency in domestic economies around the world. Yet tempered by those trade threats, the
- [04:36]
JR Whalen
US Economy is so tightly levered to Europe and Asia and other international economies. What's Charles Schwab saying about what to expect in terms of international growth? Are we expecting it to be on an upward track and full steam ahead?
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Jeff Kleintop
The pace of growth may have peaked in Europe, for example, last year Europe grew faster than the U.S. but as we look out to the second half of this year, the momentum of that growth is slowing. That's not to say the economy is likely to slide into recession, just that the growth is going to be a little slower, maybe a sustainable pace of around 2% or so. That's still pretty positive for the earnings backdrop for corporations and continues to suggest that as profit margins continue to rise in Europe, there's actually more leverage to earnings from even more modest pace of sales growth. Still see a positive outlook for the second half.
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JR Whalen
In a report you and Charles Schwab issued, you mentioned the sugar high that the market has enjoyed brought on in large part by the enactment of the tax bill. Let's not call it a sugar crash, but do we expect that sugar high to trail off a bit?
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Jeff Kleintop
We've felt a little bit of that sugar high comedown, if you will. It's interesting if we look back over the last 10 years or so, we've seen three other pullbacks like the one we've experienced in the first half of this year, down from the January highs And they followed QE1, QE2 and QE3 whenever we had that monetary stimulus, extraordinary stimulus begin to fade. Stocks fell a little more than 10% for 4, 5, 6 months. It's the same thing we've seen this time again coming off of the fiscal stimulus sugar high. The good news is the stocks seem to have reconnected to economic reality and I think that's important. What it suggests, however, going forward is maybe single digit gains and not the double digit gains we've seen over the last year.
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JR Whalen
Or I point out in the report that it's interesting how investors haven't shied away from buying stocks even in the face of trade threats being lobbed back and forth between the U.S. china, the U.S. and Europe. It's interesting how stock investors are seeing through that.
- [06:32]
Jeff Kleintop
They are looking past some of those geopolitical threats, political ones. It's interesting. I think last year taught them a bit of a lesson to maybe temper fears of what politics may mean for markets. Recall that markets and economics have probably more impact on politics than the other way around. Often people forget that. Not to say that the trade issues aren't significant ones this year for companies, given more than 50% of profits come from international trade for all the big companies in the major indices. Nevertheless, investors have been looking beyond that, focusing more on the fundamental growth they see on Main street every day.
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JR Whalen
Anything surprised you about the economic activity and the performance in the first half of the year?
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Jeff Kleintop
One of the surprises in the first half of the year was the soft spot that we saw in Europe. After pretty much a booming 2017 out of the box, Europe seemed to slow down fairly quickly and maybe there are a number of things we could point to that may have contributed to that. Hopefully that's a temporary soft spot. And we see that begin to firm up in the second half of the year. There are signs pointing to that the Composite Purchasing Managers Index rose in the last couple of months, suggesting that maybe that was temporary, perhaps weather induced, maybe some other factors involved there, but certainly was a bit of a surprise and helped contribute to international stock underperformance in the first half of the year.
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JR Whalen
In the US The Federal Reserve has made it very clear it plans more interest rate increases and it's largely fueled by unemployment sitting at 3.8% in May. There's really no sign the jobless rate will rise by any significant measure.
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Charlie Turner
Right.
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Jeff Kleintop
The job market remains fairly strong both in the US and abroad. We're finally seeing unemployment rates elsewhere in the world begin to drop below average. It was only last year that the unemployment rate in the Eurozone dropped. And that might mean we start to see some wage growth both here and abroad. Could prompt maybe central banks to continue to focus on raising rates despite few signs of inflation.
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JR Whalen
And then I guess you can't look away from the November Congressional elections, the midterm elections here in the US and that will have some impact on economic performance as well, or at least how the markets are going to respond to things.
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Jeff Kleintop
Certainly everything takes on maybe an air of increased importance as you get into a season where people are focused on what does the next two years look like and not just maybe the near term environment. I think that obviously this election is going to be one very closely watched. However, it could lead to gridlock which as we know historically hasn't been a bad thing for the stock market.
- [08:53]
JR Whalen
In the report that you and Charles Schwab put out, even though we've had the market that has shown a lot of strength and a lot of volatility, you also feel that investors should think about rebalancing their investment portfolio. Why do you think that it's maybe
- [09:07]
Jeff Kleintop
the most important time in the last eight, nine, ten years to rebalance your portfolio? It's hard to sell the leaders and buy the laggards. But when we take a look at some of these relationship within the market, everybody tries to call the overall market's direction. But if you take a look at how stretched growth stocks are versus value, growth has outperformed value for the last 10 years. US has outperformed international for the last 10 years as well. And small cap stocks have outperformed large cap stocks. Usually those relationships begin to change in the latter stages of the economic cycle where we are now. It could very well be in the second half of this year and perhaps even over the next five or 10 years, we start to see those relationships, which are historical extremes, begin to reverse. So if you haven't looked at your port portfolio in a while, you may be overweight in a number of areas that may be approaching historical extremes and really justify rebalancing back to those longer term targets.
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JR Whalen
Okay. That is Charles Schwab chief global investment strategist Jeff Kleintop joining us here in our studio with a look ahead to the second half of 2018. Jeff, thanks for being with us.
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Jeff Kleintop
Thanks for having me. It was a real pleasure.
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JR Whalen
And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.
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