SCHWAB'S SONDERS CAUTIONS ON ECONOMY

We are not there yet. Giving the keynote address on the second day of IMCA's New York Consultants Conference, Jan. 13, Liz Ann Sonders reported that at a small dinner the night before, attendees asked if she would have anything positive to say after a day of sobering discussions about the state of the global markets and economy. Sonders, chief market strategist for Charles Schwab & Co., says she "prefers to be in the contrarian camp," noting that, "negatives outweigh the positives," for the economy. But she added that "there are budding positives of the stimulus variety," referring to the growing numbers associated with the incoming Obama administration's new plan to get the economy moving again.

That sentiment, however, is tempered by the economic realities investors are facing. The plunge in retail sales, Sonders exclaims, has been an "unmitigated disaster," and that means that this recession won't get bailed out by the consumer--who have made up 71% of the GDP--as it has in past recessions. Now, Sonders adds, in addition to The Fed being "lender of last resort," the government has to become "spender of last resort," a nod to the infrastructure part of the Obama stimulus package.

A bit skeptical about whether the Nov. 20 low in the S&P 500 is the bottom for this crash, Sonders says that there's a "better than even chance" that the Nov. 20 bottom holds but she doesn't think it's "smooth sailing from here" and she expects to see "multiple bouts of testing" that bottom. She reminded an audience which needed little review that although what we are going through now is worse than anything since the depression," the average bear market decline since 1929 has been 34%--but that the 1929 to 1933 decline was 86%, and the 1937 to 1938 decline was 55%, so it's difficult to "call a bottom."

One a more positive note, Sonders pointed out that there's $8.8 trillion in bank deposits and money market funds, indicating that once investors feel more confident about investing there is money on the sidelines waiting to be put to work in the markets. But she also said that the way assets are allocated, as of Dec., is unusual, with--for the first time--42% in cash matching the current 42% in equities; and 16% in bonds.

As for where the bottom of the recession may be, Sonders says she thinks that the final quarter of 2008 would "ultimately be the worst quarter for the recession," and that she wouldn't be "shocked" at hearing a down "7% or 8% number." But take heart, she's looked back at the "10 worst GDP quarters" and found that one year later the S&P 500 was up an average of 25.4%, and after the 10 worst jobs reports during recessions, one year later the S&P 500 was up an average 23.6%, and "positive in all but 1945."

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