Recession concerns are 'a boom turning into a bust': Strategist

Charles Schwab Chief Global Investment Strategist Jeffrey Kleintop sits down with Yahoo Finance Live to assess recession worries amid retail data reports and Fed rate hikes, tech company earnings, and inflation.

Video Transcript

DAVE BRIGGS: As markets right now pointing down on the day, the Dow losing about 68 points. The S&P down slightly, as is the NASDAQ, 124 point drop. With about 50 minutes to go in trading, let's talk about this with Charles Schwab chief global investment strategist Jeffrey Kleintop, joining us to lay the foundation for what we can expect for markets this week. It is an enormous week. It's good to see you, sir. We're talking about a third of S&P 500 companies report earnings. We've got the Fed. We've got the GDP. What one number is most important to you this week? And how will markets react to it? Clearly, you have a bit of an audio-- can you unmute yourself, though, my friend?

JEFFREY KLEINTOP: You'd think I'm used to this--

DAVE BRIGGS: There you go, buddy.

JEFFREY KLEINTOP: --by now. Sorry about that.

DAVE BRIGGS: All good.

JEFFREY KLEINTOP: It's actually some of the inventory numbers we're going to get. I know that's off most people's radar screens, but listen, that's what's most crucial right here. What we've seen is a boom turning into a bust. Is it a recession? Is it not? Don't get into the semantics. The key is that we've seen an inventory buildup across retail and manufacturing that we haven't seen in a very, very long time. In fact, it's the highest we've seen in about 20 years of PMI data. Manufacturers are saying their inventories have exploded. Of course, we've heard from retailers. They reported a month ago, telling us inventories are up. I want to hear from some of these key manufacturers this week, as they report what are they seeing in that channel because it could really be an indicator of what the third quarter is going to look like. That's what I'm most focused on for GDP, employment, and growth in profits. And I think inventories are going to give us that indication.

JARED BLIKRE: And Jeffrey, I'm glad you touched on that. Dave was just talking about Snap as a potential canary in the coal mine. And I noticed that 14 analysts downgraded the stock today. Are we finally getting that to that position in the earnings season when we can have those re-ratings to the downside?

JEFFREY KLEINTOP: Yeah, boy, we really started to see those downward revisions pick up, although it's really only a US phenomenon so far. Right now, about 70% of the changes to earnings estimates by analysts are to the downside in the US over the last rolling 30 days. But you know what? In Europe, in Asia, they're still on the upside. They're still seeing higher earnings estimates for a number of different reasons. The dollar is a factor there. Of course, the dollar acting as a drag on US multinational profits.

But as we look outside the US, the dollar is actually a boost, right? As the sales in the US are actually translating back into more euros and more yen, so we're seeing a differential there. And that's interesting, how that is shaping up over the course of this week and next week as well, translating into real results.

RACHELLE AKUFFO: So then, Jeffrey, in terms of the earnings that we do have coming up this week, what are going to be the real bellwethers for you?

JEFFREY KLEINTOP: Well, so much of the market is focused on the Apples and the Amazons and Meta and those names. There's just so much of a focus on those that I think it is important and a bellwether of consumer demand and activity. But look, I'm still going back to those industrial companies' earnings and what they're talking about when it comes to earnings because that many-- I'm sorry, inventories-- because that inventory then shows up in the retail channels and across businesses.

And that's really the leading indicator I'm most focused on. It's a key indicator of inflation also, by the way. We're now seeing all this backup in inventory. It means price cuts may be coming. And that could take some pressure off the Fed here. Of course, not for this week, but perhaps for September.

DAVE BRIGGS: Maybe we don't hear enough about the contributor that housing is to CPI, a full 1/3 of inflation. So let's see where those prices go. But I do have to ask you about our semantic debate of the day, which is the comments from Janet Yellen that we are not in a recession, given the labor market. It has to be more broad-based than this. Where do you side on this?

JEFFREY KLEINTOP: When I like to look at the overall economy, I don't feel like we're maybe in one yet, but the jury is out on how much more downside pressure there is. Certainly, it's a bust of some form, and it's showing up in a number of different ways. But look, the stock market's already priced in, I would say, a mild recession with the relative performance of cyclicals lately. But look what's happening this month. Cyclicals are leading the recovery. I know you're not seeing it in tech today, but you are seeing it in energy. Financials are doing well today, industrials. And that's been the story this month. We've seen 8% to 10% gains in cyclicals. Despite all this talk about a recession, I think maybe that recession talk might have gone a little bit too far or maybe the emphasis on a deep recession, rather than perhaps a passing or mild one.

JARED BLIKRE: Well, I'm glad we're concentrating on the right things here. We got time for one more. You mentioned the dollar before. I want to show a chart on the YFi Interactive. This is year to date. Huge move for the Dixie, heavily weighted against the euro. Euro's at parity. But when you take a look at the max chart here, we punched above these 2015 highs. And guess what? Those early highs from 2020-- or excuse me, 20 years ago-- those seem to be in play right now. I'm just wondering what a stronger dollar, massively stronger dollar, looks like for the global economy.

JEFFREY KLEINTOP: You, know it is a bit of a drag. It reflects tighter financial conditions. But I do believe the dollar peaks along with inflation. And so as we're getting close to that, I think we've already seen it in commodity prices. Perhaps we're seeing it-- starting to see it in goods prices right now, with services placed at prices like housing and the like following maybe in just a little bit. That means that maybe the dollar begins to take a break here, and we finally get a little bit of an ease up in what has been a real challenge for a number of businesses around the world as they conduct a sales environment of 10% to 15% gains in the dollar this year, whether you're looking at euro or yen. It's been a big factor.

JARED BLIKRE: If the dollar breaks, I think a lot of investors and multinationals will get a break as well. Thank you, Jeffrey Kleintop. Always great to see you here.