Fed rate hikes may begin 'to lag' behind inflation: Strategist

Charles Schwab Chief Global Investment Strategist Jeffrey Kleintop the outlook on the Fed's interest rate hikes, market rallies, inflation, and what to expect from Fed Chair Jerome Powell ahead of the Jackson Hole Symposium.

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RACHELLE AKUFFO: Well, joining us now for a closer look at the broader markets is Jeffrey Kleintop, Charles Schwab Chief Global Investment Strategist. And you tweeted about a number of factors that the markets could be digesting this week. What stands out to you the most?

JEFFREY KLEINTOP: Well, volatility is still a major theme here in the markets. We've got to remember we had a really strong start to the third quarter. In fact, the MSCI World Index got off to its strongest ever start in Q3. And now, we're seeing a couple of back-to-back days, probably the worst we've seen, I think, since June. So remember, volatility is still an overall theme.

Definitely, there's a hawkish tilt to this market. We talked about the Jackson Hole Symposium and the idea that Powell may come off as a little bit more hawkish. But what I don't want investors to do is focus too much on the woods there in Jackson Hole. I wanted to focus on the tree-- on the forest and not the trees. Because I think the big picture here is that there are 45 central bankers at Jackson Hole, it's not just the Fed.

And the number of central banks hiking rates is now higher than the number that were hiking back in '08 when we were trying to rein in all that liquidity fueling the housing bubble. But now, signs are beginning to emerge that the trend in rate hikes might be nearing an end, which might be welcome news for investors. The Central Bank of Brazil and the Czech National Bank-- I know we don't talk about them a lot-- but they were the first major emerging market central banks to start tightening policy last year. And they led the rush of other emerging market and developed market central banks to raise rates.

But on August 3, they signaled they were done. It's over. And in fact, just as a last point on this, the Bank of Korea, who's the Head of the Bank of Korea, is going to be at Jackson Hole on Friday. They're likely to hike only 25 basis points this week after 50 in July. So this is a sign that rate hikes may be at the beginning of the end, which could mean good news for investors looking out to next year.

SEANA SMITH: I was going to say, Jeffrey, so then taking a look at that, what that means here, because we've seen this rally kind of fizzle out here over the last couple of days-- a rally that we've seen intact since about the middle of June. If, in fact, the Fed-- this is the beginning of the end, like you're saying, in terms of the rate hikes, does this rally simply have legs?

JEFFREY KLEINTOP: I think we're probably still in a period of volatility until we get more clarity around how fast inflation's coming down. Even if we got 0% on the CPI on a month-over-month basis every month between now and the end of the year-- we've got one under our belt so far-- that would still leave inflation somewhere around 5% at year-end. So it's a matter of how quickly it comes down.

And some of that's dependent on rents-- those really pesky and sticky housing rental rates that are just not coming down that rapidly-- as rapidly as goods and commodity prices are. So a lot's still yet to be known. But I do think the further we look out, the more benign the inflation picture starts to look in the more likely we're going to see more central banks putting on the brakes-- again, probably good news for equities longer term.

DAVE BRIGGS: Say a lot is yet to be known, PCE included. Could that influence what the Fed has to say? And do you expect Jerome Powell to say anything that would really at this point surprise the markets?

JEFFREY KLEINTOP: I don't. So yes, PCE is certainly going to matter. And there's a lot of data between now and the September meeting, of course, that we'll all be watching very closely, as I'm sure you will be covering very closely here on Yahoo Finance. But I think the key is that, no.

I think as we've stated, Powell is trying to burnish the Fed's inflation fighting credentials. They tried to predict where inflation was going a year ago and it blew up in their face. I think now they're going to lag the decline in inflation. So I don't expect to hear anything we don't already know. And that means that we're probably going to continue to see this trend that we've seen in the markets where they're rewarding shorter duration stocks, higher dividend paying stocks, and really punishing anything that's long duration like we're seeing with tech today.

RACHELLE AKUFFO: So as we are still in this essential holding pattern as we do get more clarity from the Fed, what's the investment strategy here? How should people be thinking about investing right now?

JEFFREY KLEINTOP: Well, we've been sector neutral since February, preferring to focus on characteristics of stocks that are outperforming rather than trying to pick the one or two sectors that are up. All year, we've focused on quality stocks defined a few different ways-- i.e. free cash flow yield, for example. But one way is dividend payers. I just hinted at that. Generally, a sizable dividend is a sign of financial strength and good cash flow.

High dividend stocks are outperforming the overall market in August. That's true in the US, Europe, and Japan, as they did in the first six months of this year. I wrote about that in an article titled The Return of Dividends on Schwab.com. [AUDIO OUT] bear market this year. They actually posted gains this year and continue to reward investors if the economy continues to struggle, which is our view here in the second half.

DAVE BRIGGS: All right, Jeffrey Kleintop, good to see you, sir. Appreciate the analysis.