A sudden shift in market trends is likely to blindside many investors. "A shark attack could take a big bite out of unprepared investors' portfolios who don't rebalance," is the colorful warning given by Jeffrey Kleintop, chief global investment strategist at Charles Schwab, as quoted by MarketWatch. He recommends three big evasive maneuvers to "help avoid a shark attack."
|U.S. stocks||International stocks|
|Growth stocks||Value stocks|
|Small cap stocks||Large cap stocks|
1. Look Abroad
"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," Kleintop says. To prove his point, he compared the relative performance of the MSCI USA Index and the MSCI EAFE Index since 2008. His chart shows that the USA Index delivered about double the cumulative gain of the EAFE Index over this period. "No one knows for sure if we have seen the peak of U.S. stock market outperformance of international stocks," he admits, adding, "But the risk of a shark attack appears to us to be pretty high."
2. Hunt for Bargains
Kleintop's next chart illustrates that the MSCI World Growth Index has generated a cumulative gain that is about 20% greater that from the MSCI World Value Index since 2015. While he acknowledges that growth may continue to outperform for a time, but he advises that "being prepared and rebalancing from growth to value now may turn out to be wise." (For more, see also: This Stock Correction Is Now the Longest in a Decade.)
3. Think Large
"Small capitalization stocks have been outperforming large-caps since the bull market began in 2009, but the jaws now seem to be stretched," he indicates, adding, "Rebalancing from small-caps to large-caps may help avoid a shark attack." His chart compares the MSCI EAFE Large Cap Index to the MSCI EAFE Small Cap Index, and indicates that the small cap index has produced almost twice the cumulative gain generated by the large cap index since 2009. Note, however, that he uses EAFE indices, which exclude U.S. stocks.
Limitations of the Strategy
MarketWatch observes that "global recessions and bear markets will hit all of these assets equally hard," in which case these rebalancing strategies may not offer much protection. Nonetheless, based on his analysis of the yield curve, unemployment and inflation, Kleintop does not see either a recession or a bear market on the horizon, and thus believes that investors should not flee stocks just yet.
Meanwhile, Larry Glazer, a veteran investment manager and managing partner of Mayflower Advisors, tells CNBC that rising inflation and interest rates are creating a "new paradigm" for investors. The types of investments most likely to thrive in this environment, he says, are small cap value stocks, Treasury Inflation Protected Securities (TIPS), financial stocks, and energy stocks. (For more, see also: 4 Financial Stocks With 20% Upside: Goldman.)
For the really nervous investor, Glazer advises holding cash. He said: "A 2% money market sounds really great. It's actually outpeforming a lot of areas of the stock market."
Possible 'Leading Indicator'
So far this year, the best performing sectors in the MSCI Japan Index are defensive plays such as utilities, health care, consumer staples and real estate stocks, Bloomberg reports. According to Yoshinori Shigemi, a global market strategist at JPMorgan Asset Management Japan Ltd.: "No one can really tell whether global stocks will go into a bear market. But when Japanese defensives outperform, it can be a leading indicator." He adds, "Japan is a cyclical stock market, and it could be reacting more sensitively to a possible slowdown in the U.S. economy."