Regulators ‘have probably dealt with bulk of the issues’ surrounding bank crisis: Strategist

Charles Schwab Chief Global Investment Strategist Jeffrey Kleintop joins Yahoo Finance Live to discuss the banking crisis, regulation in banking, and comments by Fed Chair Jerome Powell and Treasury Secretary Janet Yellen.

Video transcript

DAVE BRIGGS: Markets trading higher the day after Federal Reserve Chair Jerome Powell signaled the Fed's rate hike and campaign may be nearing an end. Joining us now to discuss what might be the next catalyst is Jeffrey Kleintop, Charles Schwab chief global investment strategist. Good to see you, sir. So what might be that catalyst?

JEFFREY KLEINTOP: Well, I think it's a return to inflation. You know, Chairman Powell talked yesterday about how the path of inflation going forward may be bumpy. I think that's an understatement. We just got some of the data from a couple of major countries in the last couple of days here. We just got yesterday the inflation data for February.

For the UK. 1.1% for the month. In France, late last week, it was 1%. I think on Thursday of last week, we got Spain's inflation number, 0.9%. These are hot numbers, suggesting that whatever the disinflationary impact is of the current financial worries, there's still a stubborn inflationary backdrop. And I think that's going to be the major issue that still confronts this market in the weeks and months ahead, even as some of the financial crisis concerns begin to ease.

SEANA SMITH: And Jeff, talking a little bit more about some of the stress that we have certainly seen in the banking sector over the last couple of weeks. Treasury Secretary Janet Yellen was asked about this, was asked about blanket insurance for all US bank deposits. Let's take a quick listen to what she had to say, and then I want to get your reaction.

JANET YELLEN: It's not considered or discussed anything having to do with blanket insurance or guarantees of all deposits.

SEANA SMITH: Jeff, that initially put pressure on the market yesterday. We saw all three of the major averages fall on those comments. How worried should investors be when they hear something like that from Secretary Yellen?

JEFFREY KLEINTOP: Well, in part, it clearly a sign that they weren't gathering momentum towards moving in that direction. In fact, they got a push back from the Banking Association, saying that it wasn't necessary. So even the folks in the industry saying, we don't need to go that far. Actually, the backstops that have been put in place in conjunction with the Treasury, the Fed, and the FDIC seem to be effective in dealing with deposit issues.

But clearly, there are still some banks in crisis. I don't think it's a banking crisis, however. And it's one that seems to be contained to relatively small US banks. I know that European banks have actually posted gains so far this year, outperforming US banks by 13 percentage points year to date, despite the Credit Suisse issues.

So the idea that this turns into a global financial crisis because of some, you know, unwillingness to backstop all deposits, I think, is off base. I think we've probably dealt with the bulk of the issues already.

DAVE BRIGGS: And Jeffrey, Chair Powell saying yesterday that the path forward for rate hikes might not be as linear as it now seems. Listen.

JEROME POWELL: It's possible that this will turn out to have very modest effects. These events will turn out to be very, very modest effects on the economy, in which case inflation will continue to be strong, in which case, you know, the path will look-- might look different. It's also possible that this potential tightening will contribute significant tightening in credit conditions over time. And in principle, if that means that monetary policy may have less work to do, we simply don't know.

DAVE BRIGGS: And your guess about how this impacts credit conditions and perhaps the economy as a whole, which he said would be modest.

JEFFREY KLEINTOP: Well, we'll have to clearly watch the lending data. Already, loan demand has been falling. The economy globally. I think is in a mild recession right now, so it's not surprising to see lending pulling back. We also know that banks have been tightening lending standards here and abroad. And so that will have a lagged effect on slowing economic growth.

But the reality is, in the last few months, we've seen economic data surprising on the upside everywhere you want to look. In the UK, Australia, in Germany, here in the US, data is becoming a consistently better than expected, bunking these ideas that we're in a deeper or declining economic environment.

So sure, the banking stresses could lead to more of a downturn. But in the near term, we've still got these inflation issues. And that's why you're hearing central banks are staying focused on inflation with further hikes, confident they can deal with financial stability using other tools. Today, the Swiss National Bank raised rates by 50 basis points despite, a few days ago, Credit Suisse being the epicenter of global financial turmoil. Of course, Norway's central bank also hike today. And we heard from the Bank of England today with another 25 basis point rate hike.

I think the central banks around the world there are much further away from rate cuts than many investors have perceived.

SEANA SMITH: So Jeff, how should investors play all of this?

JEFFREY KLEINTOP: That's a great question. So I think we're moving into an environment. We're still in an environment where quality rules. I think investors should be focusing on companies with strong near-term cash flow. These weren't companies you wanted to be in the 2010s. They have really performed well now. Low price to cash flow stocks have been outperforming year-to-date. They outperformed last year. They've been outperforming since August of 2020, where in the midst of the pandemic.

I think that's the theme that's true across sectors and across countries, leading to consistent outperformance. You're going to find a few more of those in international benchmarks than in the US. But overall, those are the themes you want to focus on.