Watching for signs of life

As a top investment strategist, alumnus Jeffrey Kleintop hopes for an end to economic chaos

Eric Ruth, AS93 April 16, 2020

Sitting out the coronavirus shutdown at his home in Massachusetts, Jeffrey Kleintop has found precious little time for relaxation, but lots of opportunities to ponder what might lie ahead—for the global economy, for shell-shocked investors, and for Americans’ collective sense of security.

As chief global investment strategist for financial giant Charles Schwab, the 1993 Lerner College graduate helps oversee $3.9 trillion in client assets at a time of skidding markets, record job losses, and rampant uncertainty. He’s seen financial crises before, but knows the stakes now are higher than ever, for more people than ever.

So he studies his charts and gathers clues, seeking glimmers of hope in the clouds. Here’s a look at what he’s found so far.

Q. Thanks for talking to us, Jeffrey, and we hope you and your family are doing well. Looking back on your UD days, was there anything about your college years that prepared you for these times?

A. Absolutely. The tools and experiences that I took away from the UD taught me that it’s crucial being adaptable, and that it’s always possible to find solutions. I learned that asking smarter questions is better than giving simple answers. When it comes to assessing the impact of novel events on the markets and economy, I’m reminded of one of my favorite quotes, from Charles Darwin: “It’s not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

Q. From where you sit, how serious does it all look?

A. We’ve never seen a world-wide economic freefall like this. The shutdown of economic activity on a global basis is unprecedented. Historically, it takes an average of eight months to enter a bear market. This time it took less than one month—the fastest ever. So, as Darwin suggests, we have to adapt our tools and experience to gain some insight into what may happen.

Q. What’s so different about the situation this time?

A. In a typical recession, the economy tends to have large imbalances that take a long time to unwind, such as a housing bubble or overinvestment by businesses. This time the global economy is experiencing a shock, rather than the effects of a slow build-up of excesses. While this implies that the recession and bear market could be deeper, there’s some reason to think the duration may be shorter. The shape of the recovery may depend upon how long it takes until people feel comfortable leaving their homes again. The longer it takes, and the more jobs and businesses that are lost, the more difficult the recovery.

We're in the "limbo" stage of economic data reports: How low can they go?

Economic data the most disappointing ever in China, per chart. pic.twitter.com/x9aDM0lfsE
— Jeffrey Kleintop (@JeffreyKleintop) March 30, 2020

Q. How do you begin to approach a problem as big as this?

A. To turn things around, we need to know how long it will be until people feel safe leaving their homes again. We need to work to ensure they have jobs to go back to, so we need to restore functioning markets, and support institutions that are crucial for the economy. We are watching the number of new cases in each country and tracking the peak relative to when the national shutdown took place. Once we find some consistency in the patterns, we can begin to get a sense of when economies around the world will begin to recover.

Q. Are there any rays of hope yet?

A. The emerging markets, led by China and South Korea, are now leading the recovery, as they did during the global recessions of 2000-02 and 2008-09. Together, these two countries account for about 20% of the world’s population and economy. In Asia, economic indicators we can measure daily—or even hourly—like road traffic, air pollution, and port activity all point to a pick-up. For example, data on South Korean exports in the first 20 days of March showed a monthly rebound of over 50% in goods sent to China.

Q. So we’re already on the road to recovery?

A. Not quite yet. The Western world still lags Asia, and the outbreaks in Europe and the U.S. were likely to keep those economies shutdown well into the second quarter. The change in GDP for the second quarter is likely to be deeply negative in both Europe and the U.S., even as Asia sees some improvement from the first quarter. But once we analyze how the recoveries proceeded in other areas, the U.S. can assess if the stimulus will be sufficient to avoid mass layoffs and bankruptcies. We may see equities markets rise, but they tend to move ahead of the actual data, and are likely to rally on signs of a peak in new cases—well ahead of any evidence the economy is recovering.

I'm just sayin' pic.twitter.com/s5t7CdVp1H
— Jeffrey Kleintop (@JeffreyKleintop) April 2, 2020

What to do?

Charles Schwab Chief Global Investment Strategist Jeffrey Kleintop offers advice for investors during the crisis. You can follow him on Twitter: @JeffreyKleintop.

There is no one-size-fits-all answer for how to respond to an event such as coronavirus. If you’re a younger investor who is saving and investing for a distant goal, such as retirement, the best action to take may be no action at all. If you’ve built a portfolio that matches your time horizon and risk tolerance, and you don’t expect to need money from it anytime soon, it’s usually best to stick to the investing plan you developed when markets were calm.
We continue to recommend appropriate portfolio diversification among various asset classes, including stocks and bonds. It’s also a good idea to rebalance your portfolio periodically, to bring it back to your original asset allocation targets.
However, if you’re in a position where you must sell stocks—for instance, if you’re retired and relying on your portfolio to fund your lifestyle right now—there are steps you can take to minimize the negative impact of selling in a down market, including rebalancing and tax-loss harvesting.
Meanwhile, if you’re nearing retirement, having a financial plan is more important than ever. It’s vital at this stage to understand how much risk you can stomach, both emotionally and financially, in any market environment.