A major 'shark attack' is coming for stocks, and it will bite investors who don't realize they're in a new market cycle, Charles Schwab says

• A new market cycle has begun and investors who don't realize that may be in for a surprise, Charles Schwab said.
• The firm warned there are new market leaders, and investors who are unaware risk a "shark attack" on their portfolio.

A major "shark attack" is coming for the stock market – and it means losses for investors who still think they're still dealing with the old economic and market cycle, according to Charles Schwab's chief global investment strategist Jeffrey Kleintop.

"The oceans are filled with resources and opportunities, but they also hold risks – like sharks," Kleintop said in a note on Wednesday, warning that markets are headed into a new cycle. Though a recession hasn't been officially declared, Kleintop believes a downturn began forming in 2022, spelling trouble for investors, as indicators point to the stock market entering a new phase.

That's supported by the major gains seen in international stocks in recent weeks. Though US equities have outperformed international shares over the past decade, that's starting to turn change, with the MSCI EAFE index showing stocks in Europe, Australia, and East Asia gaining 6% since the start of the year. Meanwhile, gains on the MSCI USA relative to the MSCI EAFE index are lagging.

"Each recession reverses the relative performance of US and international stocks," Kleintop said – an inversion that could take a bite out of investors' portfolios if they aren't aware of the new leadership in markets, he warned.

The shift could be explained by the fact that financial conditions are inverted from what they were several years ago. After the COVID-19 pandemic, the government doled out stimulus cash and the Fed flooded markets with ample liquidity, which allowed tech and growth stocks to thrive. But stimulus checks have largely been spent, economists say, and the Fed is scrambling to flush liquidity out of the market as inflation remains sky-high.

"Many investors are focusing on trying to determine if the bear market is over—but they could be missing the shift in leadership that may have already begun," Kleintop said. "A major shark attack is underway that could take a big bite out of unprepared investors' portfolios. Those who haven't rebalanced—trimming what had been outperforming and buying what had been lagging—could be especially at risk," he warned, adding that market cycles typically lasted for years.

Other market commentators have warned that old investing playbooks won't work in this market cycle, since the Fed is determined to bring down inflation, even if it means sparking more volatility in stocks. Bank of America warned that tight financial conditions could cause international stocks to crush US stocks for the first time in 15 years, and analysts have warned that tech will continue to face headwinds into 2023.