jeff kleintop

  • Jeff Kleintop, the global chief investment strategist at $3 trillion Charles Schwab, says many investors are focused on the wrong thing heading into 2019.
  • Rather than worrying about the overall direction of the market, traders should be focused on the opportunities that arise from the end of an economic cycle.
  • He outlines the three major shifts he expects to unfold, which he says investors should pursue in an attempt to get more defensive next year.

As 2019 approaches, investors are stressing out about the direction of the market next year.

Most strategists across Wall Street are expecting stocks to peak in 2019, yet they remain moderately bullish, especially from current depressed levels. Meanwhile, other respected pundits are expecting the sky to fall at any moment, and won’t hesitate to tell anyone who will listen.

But Jeff Kleintop, the global chief investment strategist at Charles Schwab, says people are focused on the wrong thing. Rather than pulling their hair out about the direction of the equity market, they should be scouring the landscape for opportunities.

That is, of course, easier said that done — especially when the market is as shaky as it’s been lately. But Kleintop says there are three major shifts likely to take place in 2019 as the current economic cycle winds down, each of which offers a unique opportunity.

Read more: We interviewed Wall Street’s 8 top-performing investors to get their best ideas for 2019

At the core of Kleintop’s three investing themes is one central tenet: that large, cross-asset rotations happen near the end of cycles. And since they usually begin a year or so before the cycle’s completion, there are returns to be gleaned if the right moves are made.

“We often get a turnaround in long-term asset class relationships,” Kleintop told Business Insider. “And people think they come at the beginning of the next cycle. But they don’t. They come before the cycle ends.”

Here are the three rotations Kleintop sees playing out in 2019 — a year in which he expects stocks to peak, and which could see the first economic recession in more than a decade.

(1) Growth to value — Anyone with an eye on stocks over the past couple months knows that the once-invincible growth names that drove the market higher are in trouble. That means the mega-cap tech cohort that includes the likes of Facebook, Apple, Amazon, Netflix, and Alphabet. Kleintop says traders should be seeking out beaten-down stocks available at cheaper prices. In fact, Morgan Stanley said in a recent report that the shift towards value is already underway

(2) US to international — Kleintop is quick to point out the large divergence in recent stock-market performance for the US relative to its international peers. This gap is bound to shrink eventually, especially as the end of the cycle approaches, and he says traders should get ahead of it. It’s a theme that Ben Williams, an investment director at GAM Investments, highlighted for Business Insider in a recent interview.

(3) Small-cap to large-cap — Small-cap stocks outperformed the benchmark S&P 500 by more than 60 percentage points during the bull market, through the end of September, before turbulence struck. Its waning dominance is a firm late-cycle signal, says Kleintop. And, like the growth-to-value shift, this is a rotation that’s also flashed signs of life in recent months — perhaps a harbinger of things to come.

Read more: We just got the most alarming sign yet that investors are bracing for a stock market crash

But there’s one caveat: Kleintop is not necessarily recommending overweight positions in these areas. He notes that even Charles Schwab is still neutral on international stocks for the time being.

He’s simply suggesting that investors start to ease their way into these rotations, so they’re not caught off-guard by the end of the cycle. In the end, Kleintop just doesn’t want investors to panic and double down on bad habits. 

“When people see troubled markets, they retreat back to what’s been working, and that’s the wrong thing to do here,” Kleintop said. “People should embrace the laggards, because that’s where the performance is going to be over the next five to 10 years, and may already be underway.”

SEE ALSO: We interviewed Wall Street’s 8 top-performing investors to get their secrets for success — and their best ideas for 2019

Join the conversation about this story »

NOW WATCH: The equity chief at $6.3 trillion BlackRock weighs in on the trade war, a possible recession, and offers her best investing advice for a tricky 2019 landscape