Kevin Gordon, Senior Investment Strategist with Charles Schwab & Co., spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): So what risks do you see for investors looking ahead to the rest of 2024?
KEVIN GORDON (KG): As it relates to breadth, one of the interesting divergences we’ve seen this year is just this continuation in new all time highs for the large cap indexes in particular S&P 500 or the NASDAQ or the NASDAQ 100, in particular for that large cap tech sphere. That has happened as you started to see this almost steady deterioration in breadth and it started to improve a little bit over the past couple of days. But still, you zoom out a little bit and you look at 2024 year-to-date you have seen new all time highs consistently, almost. And then you’ve seen a breakdown in the percentage of companies above their 50-day moving average or their 200-day moving average, whether it’s for the S&P or whether it’s for the Nasdaq. So, as we flip the calendar to the second half of the year, if you continue to see that divergence and that really strong bifurcation where everything at the index level looks fine, so to speak, but as you move down towards the individual member level, it doesn’t look as fine. That I think, would bring back almost the rumblings of what we saw in 2021 and start to mimic what we saw in ‘21, particularly in the back half of that year, where you had the same setup, new all time highs consistently for the indexes, but under the surface a lot of deterioration at the member level. If you started to see that or continued to see that bifurcation, I think it would lead to, probably too soon to say, it would lead to some bear market like we had in 2022. But I think it would probably give you more of a risk of the catch down at the index level versus the catch up from the individual member level.
AM: What sectors would you be putting your money in?
KG: Our Schwab sector views recently relaunched this year. We took a two year hiatus on it to rework the model and how we wanted it to be constructed and give us the recommendations so we could marry the micro to the macro. So right now the model has an outperform on financials, materials, and energy. So much more of a deeper cyclical, deeper value play, consistent with our thought that especially as we came into the beginning of this year, our expectation was that the parts of the economy that had already undergone their own recessions, whether it was housing or consumer goods or parts of manufacturing were entering or starting to enter their own recoveries, not full on expansion, full on boom, but at least moving out of that malaise and that you were gonna start to see some softening and services and some softening in labor. For the most part, that has happened and we’ve had a little bit of a softer patch on the broader macro data from that perspective. But it hasn’t yet skewed ultimately recessionary, which is why we think that some of those areas of the market, the three sectors I mentioned, are still part of that deeper value play where you could find significant value there. And from a factor perspective, which I think is probably the more important way to look at things right now, it’s been just this significant focus and for us the past couple of years on anything that screens high quality in nature, whether it’s high free cash flow or a high return on equity or a high return on invested capital. The nice thing about screening for those factors is that you don’t need to sort of pigeonhole yourself into one sector. So you don’t need to think where can I find that? Only in the tech sector, you can find high quality companies in every single sector. Energy is a great example. Yes, it goes through some pretty violent swings when you have a lot of volatility on oil prices, but at the same time, the profitability of that sector has improved a lot over the past few years. And actually I think, no surprise, but over the past four years, energy is the second best performing sector, only slightly behind tech. So we think that there’s a lot of value to be found in traditional value, but at the same time what has been driving some of the strength and some of the fundamental strength there is also found in areas like tech or even consumer discretionary to some extent.
AM: Do you see the same sort of explosive growth in energy as AI?
KG: I think that, yeah, it has the potential to touch a lot of areas. I’m not yet quite sure exactly where it’s gonna be and we’re all trying to figure out, I think, the estimate of how it’s gonna impact industry by industry. But yeah, when you think about the demand for it, certainly on the chip or the tech side, it’s pretty clear the market has already told us that. But as you move throughout different sectors, you can make the case that, yeah, it’s great for utilities because of the power needs and the electricity generation needs, but it’s also the construction of those power plants. So that weaves in then industrials and materials, and then it’s the financing of that which weaves in financials. So you could literally get to a spot where all 11 sectors are benefiting from it. And the, the ultimate play, so to speak, just means staying invested in the equity market broadly. That doesn’t mean, obviously there’s gonna be some areas that do a little bit better, but I’ll again reference back to our outlook that we wrote for this year. One of the things and themes that we wanted to really focus on was not just having investors only go to the AI creator side, but focusing on the adopter side. So the companies that don’t have to undergo these really large CapEx projects or spending projects in order to invest in any kind of infrastructure, but they’re just on the receiving end of whether that makes the technology, makes their business more efficient or they just benefit from it from a labor perspective. So I think that is probably gonna be more of a focus, not just in the next year, but you know, whether we’re at a secular turning point, probably the next five to ten years.
AM: Well, thanks a lot, Kevin.