Charles Schwab: Time to Rotate to International, Value and Large-Cap Stocks

May 15, 2018 — 2:22 PM EDT

Investors who want to avoid a shark attack with their investments this summer may have to go contrarian, which means rotating out of stocks based in the U.S., investments that are considered growth stocks and those that command a smaller market capitalization.

That's according to Jeffrey Kleintop, the chief global investment strategist Charles Schwab, who wrote in a blog post that there are three or more "major shark attacks" that could hurt investors who have not pulled back on what has been outperforming and buying what has been lagging. "When does it make sense to be a contrarian? When trends are at an extreme, or, in other words, when the shark's jaws are wide open," wrote the strategist at The Charles Schwab Corporation (SCHW). "It's time to rebalance between three stock market asset classes: U.S. and International, Growth and Value, and Small and Large."

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Take a move out of U.S. stocks for starters. According to Kleintop, after 10 years of U.S. stock market outperformance, investors could be poised for a shark attack. In the early 1970s, international stocks were outperforming, but when that started to wane, investors who hadn't rebalanced lost out. That happened again in the late 1980s with international stocks. But this time it's U.S. stocks that could be poised for a decline. "No one knows for sure if we have seen the peak of U.S. stock market outperformance of international stocks; the shark jaws could open wider before biting down. But the risk of a shark attack appears to us to be pretty high," he said. "Prepared investors should be thinking about being a contrarian and rebalancing their portfolios from the U.S. to international stocks after a decade of U.S. outperformance."

As for moving into value stocks and away from growth ones, Kleintop said that investors should have a balance between both styles. He noted that growth outperformed value in the late 1990s as the tech sector led everything higher. But between 2000 and 2007, value came back into vogue after tech stocks crashed, with investors favoring financial stocks. Once the financial crisis happened, investors went back into growth, with the tech sector the leader once again. As a result of all the back and forth, having exposure to both sectors could prepare investors for the sharks. "While the jaws may widen further before aligning with the levels where they began to bite down in the past, being prepared and rebalancing from growth to value now may turn out to be wise," wrote Kleintop.

On the small-cap versus large-cap front, Kleintop said that now may be the time to rotate into larger-cap stocks, given small-cap ones have outperformed since the start of the bull market back in 2009. With a wide margin between the performance of the two groups, rotating out of small caps could help investors avoid a shark attack in that area of investors' portfolios, said the market strategist.