Stocks jump as investors weigh earnings, COVID

Jeffrey Kleintop, chief global investment strategist at Charles Schwab, joined Yahoo Finance's Adam Shapiro and Seana Smith to discuss investing amid regulatory concerns, China's crackdown, and market volatility.

Video transcript

SEANA SMITH: We want to bring in Jeffrey Kleintop. He's the chief global investment strategist at Charles Schwab. And Jeff, there's a lot going on in the markets right now. I guess, yes, we're seeing gains today. But just in terms of the macro picture, we have the Delta variant of course. That's a potential headwind here. We have infrastructure talk, something that investors are closely watching. When you take all this into consideration I guess, how do you see the market viewing these two big events that we could potentially see over the next several weeks?

JEFFREY KLEINTOP: Well just breaking down today, you're not seeing the infrastructure stocks lead the market higher, stocks like Vulcan or thinking about Jacobs Engineering. Some of these stocks that are obvious plays on getting this infrastructure package done, not leading the market higher. Tells me the market's kind of moved beyond this idea of the infrastructure package. Yeah, it's going to get done. But maybe that's not the key driver at the moment.

One of the interesting things, however, about the Delta variant while in some parts, in some states, some parts of the world it gets worse, we've actually just recently in the last few days, and it may just be a dip, we've seen the case count come down. And along with that, in lockstep with that, cyclicals have started to outperform. We've seen value stocks, international stocks, airline stocks, do quite a bit better. And that's something that's happened all year. As the case count goes up, those stocks underperform the leadership error defensives.

And as the case count comes down, those cyclical stocks come back. And that's what we've been seeing in the last few days. And that might hold up over the next few weeks as we move beyond the peak of the earnings season if the case count continues to recede.

- Hey, Jeffrey. I'm looking off screen here because I'm checking another computer. And I'm looking at the 10 year. The yield is barely, it's not even 1.-- it's 1.17. It's exactly where it was yesterday. We're-- I was about say the middle of August. It's early August. It's as if investors are at home and in bed. Who's paying attention here? Because where are you going to get true yield? I realize that some people are going into equities. But the volume doesn't seem to be there to be indicating, look. This is where you want to be.

And some people might have thought, emerging markets, you want to look overseas. What should we be doing to position right now?

JEFFREY KLEINTOP: For yield? Well, I think if you're looking to find some income in your portfolio, you're probably going to increasingly look to equities. It's not that fixed income doesn't play an important role in a portfolio as a diversifier. It does. But you're going to find more yield increasingly in the equity space. Remember, equities not just here but abroad are now getting the OK to increase their dividends post pandemic. That should really increase the dividend payout. The STOXX 600 index in Europe hit a new all time high today led by some of those sectors that are beginning to really increase their dividend payouts.

And hey, this isn't the first time we've seen investors move from bonds into equities for yield. We saw this in Japan 20 years ago when they adopted a zero interest rate policy. Investors in Japan, which held 90% of their portfolios in fixed income, went to a balance of cash and equities to find that yield. That may be what the future holds here as well.

SEANA SMITH: Jeffrey, let's talk about what's going on with some of these Chinese stocks. Tencent down huge today. Of course, some concern there just in terms of the rhetoric that they've used towards gaming and potential crackdowns there. We've seen this in a number of Chinese related stocks over the past several weeks. How do you look at that? And I guess, the investor interest. I mean, should investors be avoiding some of these names at this point?

JEFFREY KLEINTOP: Well regulatory risk comes in all countries. In China, it comes without warning. It kind of comes overnight. And I think a lot of what we're seeing this rush of new regulatory policy in the last, let's say since the 24th when the banning profit for after school tutoring and meal delivery companies were asked to raise wages and benefits for their workers hit the tape. And since then, we've heard now about potential gaming here targeting young people, students.

These actions, I think, are tied to the census report that came out a couple of months ago in China and which really highlighted a number of key issues that China need to address demographically. And I think they've done a lot of that. There might be more to come on the healthcare side, might be more to come on housing. But they wouldn't be new. So I think the market may have overreacted to the idea that every industry, and even more so, the tech industry is just going to continue to be nailed here.

I think the intensity of the crackdown may soon fade. And that means perhaps the bias is to the upside here in China. But let me say that investors need to get used to this kind of volatility. Stocks in China have dropped this year 27%. The average peak to trough drop in China in a year is 28%. So there's a bear market every year in China. It's a question of, do you hold on for the long term and get those double digit returns? I think there's an attractive longer term case to be made.

- I want to pick up on what you just said, though, an attractive longer term case to be made. It seems to me you would have to time the market if you're going to be investing in China. And you're going to have to be going in and out within 12 month periods and stay on top of it. Or else you're going to get burned.

JEFFREY KLEINTOP: Which would be extremely hard to do. And I'm not recommending that at all. I mean the regulatory process is totally opaque. So what I'm saying is though the average-- over the last 20 years, the annualized total return for the MSCI China index is double digit. So if you just rode that roller coaster, you did pretty well. And I think given where valuations are in China, which are pretty much in line with their 20 year average, the only market in the world that has a valuation in line with its 20 year average, or not well above it, I think that speaks to continued perhaps double digit gains over the long term riding through the incredible volatility that comes from China's opacity.