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‘The U.S. is behind the ball’ on COVID-19 vaccine, ‘and the Fed has done all it can’: Strategist

Charles Schwab Chief Global Investment Strategist Jeffrey Kleintop joins Yahoo Finance’s Akiko Fujita to break down the latest market action as stocks erase early gains following Jerome Powell's testimony on Capitol Hill.

Video Transcript

AKIKO FUJITA: Jeffrey, it's always good to talk to you. We heard from the Fed chair today pretty much reiterating what we have heard him say over the last several weeks, which is that we do need that fiscal help. Without that fiscal help, the recovery cannot continue in the manner we've seen it in. I mean, how do you look at the dynamics at play right now, especially given where Congress is, that we're unlikely to get any kind of stimulus until after the election?

JEFFREY KLEINTOP: You're right, there's not much bandwidth in Washington right now. With so much else going on-- the election and the potential for a replacement of a Supreme Court justice-- it just doesn't seem likely that we'll see that stimulus. Yet, the US is an outlier when we look at how much fiscal stimulus has been provided by similar countries around the world on a percentage of GDP basis.

The US has provided about 15% of GDP in the form of stimulus, some of which has already faded, as we know, with the CARES Act. Europe's it's 30%. Japan is at 40%. So there's a very big difference in the amount of fiscal stimulus being applied around the world continuing to sustain those economies versus what's already seeming to fade in the US. This can become an increasing problem, and one I think that the stock market may be sniffing out. You know, even today, or I should say including today, international stocks are faring much better than US equities. And that's been a trend here in September.

AKIKO FUJITA: Yeah, I want to get to the international stocks narrative you have highlighted for some time in just a bit, but when you talk about the amount of fiscal stimulus there, comparing the US to Europe or Japan, what does that suggest in terms of the additional firepower that will be needed eventually, when Congress does get to passing a stimulus? You could argue that the US was pretty quick to act in the first several months of this pandemic, which has been supporting the recovery, at least until the last month or so.

JEFFREY KLEINTOP: Yeah, that's all very well said. The very quick action by both the Fed and from a fiscal perspective really did help, but it is already starting to fade. And you know, so much depends on when we get that vaccine. As you noted, Dr. Fauci said it may be available for all Americans by April. Perhaps that's later than some expected. I'm not even sure that's really something we can count on.

But that's really the next stage of the recovery, to get the entertainment and travel sectors back, which employ a very large percentage of people, even a higher percentage than they contribute to GDP, getting them back to work again. So the virus is the number one fiscal stimulus we could get-- or I'm sorry, a vaccine is the number one fiscal stimulus we could get-- and that still seems way down the line. So until then, the US is behind the ball, and the Fed's done all its can.

AKIKO FUJITA: And Jeffrey, what about the hit to small businesses? This is something that was raised in the hearing yesterday, as well as today, about the Fed's Main Street lending program, and how underutilized it is. You heard Treasury Secretary Steve Mnuchin saying there's not a whole lot that can be done here, but that's the part of the economy that we often don't see reflected in the markets, but those that are taking a significant hit right now.

JEFFREY KLEINTOP: Yeah, it's true, a lot of that money that the Fed has set aside to aid small businesses is just not getting to them, but it's not really the Fed's fault. Banks have been much tougher on loan standards. In fact, nearly 70% of banks have raised standards, toughened standards on loans to small businesses. That's per the Fed's own senior loan officer survey from back in July.

So we've seen it much more difficult to get a loan, even though the credit's available. And remember, those loans will have to be retained on bank balance sheets, some of them. Most of them will be sold to the Fed. And that's the problem. The Fed can only do so much to encourage banks to lend to those businesses. Banks are still very wary, given the history of the last 12 years or so, and making sure they have enough capital to get through a downturn.

AKIKO FUJITA: Let's get back to what you mentioned earlier, which is that the average international stock is now outperforming the average US stock for the first time in a very long time right now. Given what's playing out on that front, how have you increased your exposure to international markets? How do you think investors should be weighing those options right now?

JEFFREY KLEINTOP: Yeah, we think investors should be looking at their portfolio, especially the portions that they're overweight, like those US tech stocks that have just been the darlings for so long that are now in the midst of a pullback. But we think it's an underperformance cycle that may last some time. Whenever we get a new cycle, we get new leadership.

You know, in the '80s, it was international, in the '80s, it was the US, in the early 2000s, it was international, and over the last-- much of the last 12 years, US stocks have been leading. We're now in a new economic cycle globally, and we're seeing those behavioral and fundamental factors shift to favor international equities. And that's primarily developed, but emerging markets look fairly good, as well, with China leading the global recovery from COVID-19.

AKIKO FUJITA: How much of that is contingent on the performance of the dollar? You know, we've talked a lot about the weakness of the dollar over the last several months, over the last year, really, but we have started to see that kind of bottom out.

JEFFREY KLEINTOP: You know, the dollar has been a help. It's falling you know roughly 10% or so from its peak earlier this year, but that's not essential to seeing the improvement. We don't want to see a sharp rebound in the dollar that might tighten credit conditions around the world, but a stable to lower dollar is a positive, but not the main positive. The real shift here is the big difference in valuations and a further recovery in terms of COVID-19 and getting back to the amount of stimulus that's been provided.

You know, if you take a look at the unemployed in Europe, they're on furlough programs. But even if those furlough programs end and they go on unemployment, that replaces anywhere from 60% to 80% of their prior income. In the US, it's nowhere near that. So very different in terms of the amount of fiscal support aiding those economies into 2021, the first year Europe's economy may outgrow the US on a GDP basis in over a decade.

AKIKO FUJITA: Does that change for you, though, given the headlines that we've gotten out of Europe over the last few days, the UK looking at additional restrictions, potentially? And then, you know, the rest of Europe, when you look at a place like France or Spain, those numbers have continued to tick up.

JEFFREY KLEINTOP: That's the big risk. We have seen those numbers tick up, although hospitalizations haven't, and neither have deaths. But the number of cases have, and Israel has gone to a national lockdown. The UK is imposing new forms of lockdowns. And certainly, mass lockdowns across Europe would return them to recession and negate pretty much everything I've just said. But hoping that's not going to be the case.

We've seen the economic cost of the lockdowns, and the fact that it seems like this next-- this wave of positive cases doesn't seem to be resulting in hospitalizations, meaning the most vulnerable portions of the population, the ones that would be overwhelming the health care system, don't seem to be getting infected. And that's a positive here. So I'm hopeful we don't see a second wave of national lockdowns across Europe, but if we did, absolutely that'd be the recipe for a second downturn in the markets.

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