Jeffrey Kleintop of Schwab surveys economic and market trends across the world, and in an interview on Tuesday, he covered the globe. Among the thoughts of Schwab's chief global investment strategist that he shared are:
- The Fed will "probably" raise rates in September, though it may not happen until the December Federal Open Market Committee meeting or even early next year (a contention that the FOMC's newly released minutes support).
- Like the Swiss central bank devaluing the franc earlier this year—"which everyone has forgotten"—"six months from now we'll forget about" China's currency devaluation last week.
- Climate change is still a relatively small issue for most investable companies now, but climate change regulation and legislation will produce investing winners and losers.
- While the U.S. presidential election next year is interesting, the election he'll be watching in 2016 is December's Spanish national election.
- The "key theme next year will be central bank divergence"
- The recent money flows made by investors from U.S. equities to international funds "tactically makes sense" but also he hopes it's a longer-term trend.
- There's "far too much concern about Greece," and the European Community is in better shape than many observers think.
Here, in more detail, is what Kleintop sees ahead.
1. The Fed
Speaking the day before the Federal Reserve released the minutes of its July FOMC meeting, Kleintop said he thought the Fed would raise the federal funds rate by 25 basis points, "probably" in September, though possibly in December or early in 2016. However, he said "it's not how often but when" the Fed raises that will be important to the markets.
Responding to a charge raised in The Wall Street Journal on Monday (and by many others previously), he denied that the Fed may wait to raise rates because it fears losing "ammunition" to fight the next economic downturn. "We talked to three Fed governors who said" such a notion "was the most ridiculous" thing they'd heard. That's because, Kleintop says, "the longer you wait" to raise rates, "the worse it is."
In the minutes of the July 28-29 meeting released Wednesday, the FOMC "concluded that, although it had seen further progress, the economic conditions warranting an increase in the target range for the federal funds rate had not yet been met. Members generally agreed that additional information on the outlook would be necessary before deciding to implement an increase in the target range."
The minutes also show that while inflation had yet to reach the Fed's targeted 2% rate, FOMC members expressed general satisfaction that its other datapoints necessary for raising rates — a growing economy and an improving labor market — appear to be moving in the right direction.
2. China
While many market observers see the Chinese sky falling, Kleintop believes that China's currency devaluation is simply "policy fine tuning" by the government, and an acknowledgement that China is moving from a manufacturing and exporting-focused economy to a more domestic-consumer-focused economy. The devaluation came because Chinese leaders saw that "consumers were benefiting, maybe too much" from the big rise in the value of the yuan, which makes imports cheaper, using as an example the big rise in sales of Mercedes-Benz cars in China.
He says that most China watchers "haven't paid enough attention" to data like non-manufacturing PMI in China, which he trusts more than some other Chinese government economic data — "there's no doubt they're lying to us" about some other data — because it comes from a survey of private companies. He says we "have to change what statistics we look at," citing as an example electricity use in China which, while it increased only 1% over all, has risen by 8% in the service sector and 5% to 6% in the residential sector.
"If consumer spending falls" in China, then Kleintop would be worried, but he sees no evidence of that happening. "Six months from now we'll forget about" the currency move, he predicted, just as the market has done with the Swiss central bank unpegged the franc from the euro in January. 3. Climate Change
Which companies will benefit and which will lose as climate change affects business and the economy?
Kleintop said that larger-cap companies rather than small caps would benefit in the reaction to climate change legislation and regulation, such as the methane limits announced by the Environmental Protection Agency on Tuesday, President Barack Obama's environmental initiatives and the U.N. climate change meeting this fall in Paris.
