Bank of Canada has been ‘one step ahead of the Fed’ at every single meeting: Strategist

Charles Schwab Chief Global Investment Strategist Jeffrey Kleintop joins Yahoo Finance Live to explain the difference between the Bank of Canada's approach to monetary policy and that of the U.S. Federal Reserve.

Video transcript

SEANA SMITH: Jeffrey, we certainly have had no shortage of headlines here coming out today and over the last several days. I'll let you take your pick just in terms of what you're focusing on and your huge takeaway from the trading action so far this week.

JEFFREY KLEINTOP: Well, you know, I think one of the things that's supporting the markets here is that China's reopening. I mean, this reopening has led to better PMI numbers we got this morning in Europe. Europe is one of the biggest suppliers to China. They're seeing that return of demand really helping to boost activity there, their PMI numbers coming in above 50 for the first time in six months. So their economy back in expansion territory. You're seeing that show up in some of the earnings forecasts as well.

I would look to some of these businesses that have a lot of China exposure to perform relatively well as we go through the earnings season, as they guide up perhaps relative to what they were thinking even just a few months ago. I know that there are some big tech names reporting this week, like Intel, with 25% of its revenues tied to China. So there could be a big story there, all tied to what's going on over there in Asia.

DAVE BRIGGS: And we'll get Microsoft in just a bit. But we also heard from 3M, from Union Pacific, from Verizon. You mentioned the tailwind of China reopening, but a lot of headwinds in those earnings. Nothing great about what's around the corner in this economy. And you look down at the S&P, and it's essentially flat on the day. What does that tell you? What did you learn from those relative bellwethers on the economy?

JEFFREY KLEINTOP: Well, clearly, we are-- I think it's pretty clear we're in a recession. I know an official recession hasn't been declared yet, but I think it's fairly obvious we're in a pretty mild one here, maybe in Europe as well, other parts of the world. And so we're seeing pretty lackluster revenue growth. And that's leading us into an earnings recession. But it's a fairly mild one.

If you take a look at what businesses are talking about, we're looking at mild year over year declines, maybe this quarter, maybe next quarter, maybe in the second quarter as well. Nothing like the 20% to 30% earnings plunges we've seen during prior recessions. So this is a fairly mild one. And I think the market's looking for signs it's nearing an end. We're not there yet, but I think that's one of the things lending some support to equities, despite somewhat disappointing results.

SEANA SMITH: Jeffrey, what are some of the signs that you're particularly looking for in terms of determining whether or not we're near an end of that recession?

JEFFREY KLEINTOP: Well, a couple of things. One, are we close to the end of Fed rate hikes? One of the things we can watch tomorrow is the Bank of Canada. The Bank of Canada has been one step ahead of the Fed every single meeting this year. They were one meeting ahead of the Fed to hike rates, one meeting ahead to begin to step down. And now they're signaling tomorrow maybe their last rate hike. And if that's true, confirmed with the press conference, what we hear from them, that could be a sign that maybe the market's willing to extend the same kind of invitation to the Fed to say, hey, it's time to take a pause. And if that were true, certainly, we ought to see stocks react positively.

But if the Bank of Canada finds other reasons to be concerned about inflation perhaps because of the revival in China's growth picture and the potential inflationary consequences of commodity demand returning, goods demand returning, I'd note we heard from a few businesses that their inventories have come down fairly rapidly in part because of Chinese consumer demand. That may give them back some pricing power in categories that had been falling like furniture and apparel. So we'll have to see what that means going forward. But certainly, central banks are going to play a key role this week and next.

DAVE BRIGGS: Yeah, that sounds disinflationary. I mean, that sounds like the Fed, they don't want to see that. But your notes point out that international stocks have been outperforming. Why, and do you expect that to continue?

JEFFREY KLEINTOP: Yeah, this happens every recession. We see a reversal in the performance of US and international stocks. So whatever performed the last cycle then goes and underperforms in the next one. It's behavioral as much as fundamental that we see this happen. After a full cycle of outperformance, trends revert. It was in the 1980s and the 2000s that we saw international outperform. And then in the 1990s and the 2010s, US stocks outperformed.

Now we're seeing that rotation begin to favor international stocks and for a variety of reasons. One, valuations are lower. Two, earnings are coming in stronger. But we're also seeing a lot more of the characteristics that have led to outperformance here over the past year, like low price to flow ratios or high dividend yields. Really, the market's favoring those characteristics, and they're found more prevalently outside the US.

So last year, we saw international stocks outperform for the first time in a decade. This year, we're also seeing that leadership. I think this is a longer term trend. And so something that many investors are probably not aware of or even the risk in their portfolio of not owning some international diversification, simply focusing on US equities. So I'd keep that in mind as you build your portfolio here. Look just beyond the US now.

SEANA SMITH: And Jeffrey, speaking of that, from an investor's perspective, if you're looking to capitalize on that, I know you specifically like China, but what are some of the ways that you are playing this recovery that you're seeing overseas?

JEFFREY KLEINTOP: The beauty is you don't have to be country specific right now. There are times when you want to be very specific in your sectors, your industries, and your countries. I don't think you need to be in that broad international exposure through one of the major ETFs or funds or other solutions that provide exposure around the world. Europe looks particularly good right now. The economic surprise index in Europe is nearly hitting 100, meaning economic data is coming in so much better than economists expected. And we're seeing some-- a better outlook there transferring maybe in earnings as well.

But in Asia, with China's reopening, that's beginning to fare better with the commodity demand picking back up, Latin America is improving. So there's really a lot of areas around the world that are working right now, leading to outperformance of the US market. So I don't think you need to be very specific. Broad diversification can pay off here.

DAVE BRIGGS: All right, Jeffrey Kleintop, good stuff. Thanks again, my friend.