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'We’re seeing a renewed trend toward slowness in the economy': Strategist

Jeffrey Kleintop - Chief Global Investment Strategist at Charles Schwab joins Yahoo Finance to discuss how markets are faring post-election and on Covid-19 vaccine progress.

Video Transcript

- All right, let's talk a bit more about how to think about the markets now that we are, I think we can fairly say, in the interim period between presidential terms, though I'm sure the president would have something to say about that. Let's talk about what this means for investors.

We're joined now by Jeffrey Kleintop. He is the Chief Global Investment Strategist over at Charles Schwab. Jeff, it's great to talk with you. Let's think about that transition period that you wrote about in a recent note, how markets tend to perform in this, you know, 70, 80 days between administrations. Are there any lessons to take away from history, and how are you, kind of, talking through this with clients?

JEFFREY KLEINTOP: There are a couple of lessons. I think the most important one to take away is that this period from Election Day to Inauguration Day almost always includes some type of major geopolitical development, meaning some country around the world, when they believe the US is distracted, maybe internally focused, takes some action in conflict with US interests.

We've seen this again and again and again, going back over 50, 60 years, during these periods of transition, and the markets' freak out around them really depends on the economic backdrop. That's the second half of this, and usually, when we're seeing the global economy in a long expansion, or even in the early stages of a recovery as it was in 1980 and 1992, we see markets do OK, fairly well. They recover quickly from about a 5% drop tied to one of those events.

Only when we're in the midst of a recession, as we were looking back in 2000 and 2008, do the markets fall in that geopolitical news and continue to fall over the period. So the two messages are expect some type of development. I don't know where it could come from, China, and something with Russia and Iran, in Syria, there could be something from Venezuela, North Korea rattling the saber again. All those issues are ripe for an event in the coming weeks, but the recovery is usually fairly swift after an initial sell off when the global economy is in recovery.

JULIE HYMAN: lots of, lots of contenders to create geopolitical tension, but I do want to pick up on the recovery or recession theme that you mentioned. It seems like the drumbeat is rising for a double dip, a W, whatever you want to call it, recession here, especially we don't see some kind of stimulus from Congress. Where do you put those prospects, and then how are you factoring that into strategy?

JEFFREY KLEINTOP: So looking at the overall economy, there's still a lot of weakness, and it's increasing in countries like France, which is now in what I call lockdown light, compared to what they did back in the spring. Ireland's in the midst of a lockdown. Other countries in Europe are seeing this as well. There are states in the US that are imposing new restrictions.

So we are seeing a renewed trend towards slowness in the economy, and I think that may show up in job growth as well, but what we're not seeing is that same thing reflected in the stock market, and there's a key reason for that. Manufacturing is booming right now, right? The service sector is the one that's still locked down, restaurants and travel and leisure activities, and they're going to remain locked down, but we're seeing manufacturing just booming as people are spending on goods, rather than experiences.

Manufacturing only makes up 17% of the world economy, only 11% of the US economy, but it's 50% of the market cap of the stock market, so earnings and stocks are tracking that booming manufacturing activity, one of the reasons why we're seeing more performance out of value shares lately, but that's not-- that's not enough to stabilize the overall economic picture. So we need more stimulus from the government. We need more stimulus from the Fed to stabilize jobs in the economy, but the stock market is actually in a bit of a sweet spot and may continue to perform well despite this slowdown in economic activity and this race between the COVID infections and the vaccine.

BRIAN SOZZI: Jeff, a COVID vaccine, should that start to be distributed within the coming weeks, really, really big question mark here, does that keep the US out of recession?

JEFFREY KLEINTOP: You know, it's hard to say. I don't think it's like flipping a switch. I think it can return some confidence, but remember, we've got to make billions of doses of this stuff. Everybody has got to take it three to four weeks apart. You know, it's got to be held at negative 112 degrees Fahrenheit, because it's messenger RNA, and then you've got the fact that only 20% of people in surveys are saying they're even willing to take it.

So it could take a long time before we get enough immunity that we don't need to engage in these physical distancing or mask wearing protocols or continue to see these types of effects in travel and entertainment and airlines. So I think it could be until the latter part of next year, maybe the second half of next year, that we really begin to unlock the economy, even if we were to get a vaccine approved in the near term.

- All right, Jeff Kleintop with Charles Schwab. You're going to stay with us through the break coming up on the other side of the short commercial. We're going to have the opening bell here on Wall Street on this Wednesday morning. We're back with that in just two minutes.