March Madness on the basketball court is off to an exciting start, with upsets like Georgia State’s defeat over Baylor on Thursday. Meanwhile, markets expert Jeffrey Kleintop says he’s expecting some unexpected movement in stocks – but will it be on the upside or the downside?
“With the exception of last year’s steady rise, March has been a maddening month for investors recently. In four of the past five years, March gains in the stock market, as measured by the MSCI All Country World Index (ACWI), were undone by a pullback of about 10% that began in April or May,” said Kleintop, Charles Schwab’s (SCHW) chief global investment strategist, in this week’s outlook. “It later took stocks at least five months to climb back to the peaks they hit in March.”
What could bring excitement to stocks? In Kleintop’s mind, investors and advisors should focus on four key factors: the economy, policy issues, market fundamentals and sentiment, along with 16 associated trends (marked in bold type below).
“While making stock market predictions can be as challenging as forecasting basketball tournament winners, we think it’s worth examining the influence of each of these factors,” he explained.
When it comes to the economy, change in oil prices and the dollar are making headlines.
“Lower oil prices are a net positive to the global economy, saving oil consumers an amount equivalent to 2% of world gross domestic product,” Kleintop points out. “Those consumers can spend those savings elsewhere even as producers are forced to surrender income.”
The stronger dollar has a moderating impact on oil prices outside the United States, which means that oil prices are down 35-40% in Europe and Japan vs. around 60% at home.
The dollar’s growing power means, Europe, Japan and China are having their strongest year-over-year export growth in years; meanwhile, U.S. exports are contracting.
The winner? “The dollar may win out over oil as the more potent force redistributing global economic growth,” Kleintop stated.
Europe’s economic growth could move up to 1.3% this year vs. 0.9% in 2014, but China’s growth may slow, according to Bloomberg’s latest economist consensus.
But since Europe’s GDP is twice that of China’s, a gain of 0.4% could “offset a decline in Chinese GDP growth of as much as 0.8 percentage points, to 6.6% in 2015 from 7.4% last year,” the chief investment strategist said.
The winner? “Better growth in Europe is likely to win out as the more potent force for the markets in this match-up,” he said.
Market volatility is expected as the Federal Reserve moves to raise rates. Meanwhile, the European Central Bank’s bond-buying program could help the region avoid the specter of deflation — even if only for the next year or two. Increased stimulus in Europe, where it is most needed, may help offset the expected drag on the global economy of interest rate increases by the Fed, at least in the coming months.
The winner? “This matchup is too close to call,” Kleintop said. “So, don’t fight the Fed, but don’t flee the ECB.”
As for the current debates between Germany and Greece, Greece (of course) is looking for concessions on its bailout terms from the EU, while Germany and other countries are holding a hard line.
The fear is that a Greek debt default might open a path for other countries to leave the eurozone, which would widen risk premiums across European assets, the Schwab CIO says.
The winner? “Despite the appearance that Germany is favored to win this match-up, Greece is likely to eventually win some form of restructuring of its debt, so there may be some volatility on the way to an upset,” explained Kleintop.