"Watch the yield curve," says Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co. If the curve inverts, meaning long-term interest rates fall below short-term rates, a recession is coming, usually 12 to 18 months later, according to Kleintop, who spoke at a strategists panel at this week's Investment Advisor Forum sponsored by Investments & Wealth Institute, formerly known as IMCA.
That would spook stocks, finally ending a long-term rally coming up on its 10th year on March 9. "The downturn could come early next year," said Kleintop.
In the meantime, he recommends that investors stay invested in stocks in a diversified portfolio that includes bonds to buffer the volatility of equities and heavily weights international shares, accounting for half of an investor's equity holdings.
"Bonds are an important buffer to the volatility to come," and "the global correlation among the top 10 stock markets is the lowest in 20 years. Take advantage of that."
Kleintop also recommends that investors rebalance asset allocations — "bring allocations back to long-term targets to get ahead of future volatility" and rebalance among countries and sectors within equity portfolios. "We're late in the cycle."
Even sector rebalancing favors Europe and Asia over the U.S., said Kleintop, noting that tech stocks, especially FAANG (Facebook, Amazon, Apple, Netflix, Google parent Alphabet), which outperformed the S&P 500 by large margins, reflect a U.S. bias.
Tech stocks account for 20% of the S&P 500 but only 6% of the EAFE index, which comprises developed markets excluding the U.S. and Canada. Financials account for 21% of the EAFE index.
Both Kleintop and Katherine Nixon, chief investment officer for the wealth management business of Northern Trust, who also participated on the strategist panel, expect the bull market in stocks will continue this year. Nixon sees "strong double-digit returns and valuations extended in the U.S. and abroad" in part because "a lot of investors are playing catch-up."
