October 4, 2012

Economy’s Been Down So Long, It Looks Like Up: Schwab’s Liz Ann Sonders

Contrarian Sonders at Morningstar ETF conference says debt crisis aside, bearish U.S. investors are losing out on positive market trends

Schwab's Liz Ann Sonders speaking with Investment Advisor's James J. Green at Schwab Impact in 2011. Schwab's Liz Ann Sonders speaking with Investment Advisor's James J. Green at Schwab Impact in 2011.

Liz Ann Sonders, Charles Schwab & Co.’s chief investment strategist, sees good news where most people don’t. Or to put it another way, the U.S. economy has been down so long, it looks like up to her.

Striding the stage Wednesday evening as she delivered the opening keynote speech at the Morningstar ETF Invest 2012 conference, Sonders asserted that she’s a contrarian, so the level of pessimism she’s heard about the economy and markets “is music to my ears.”

As a contrarian, Sonders has turned that pessimism around and come up with a case for optimism that includes “incredibly strong corporate earnings, a ton of cash at corporations,” and what she sees as green shoots of economic promise in housing and manufacturing.

She also sees promise, perhaps counterintuitively, in the fact that the U.S. recovery from recession has been fairly anemic. Since spring 2009, Sonders said, “we never got to a high enough level to drop down again.”

U.S. Debt: ‘The Really Ugly Part of the Story’

Of course, the U.S. still has a debt crisis and a fiscal cliff to contend with, Sonders acknowledged. Throwing “the really ugly part of the story” right into the middle of her speech, she noted that the strength of U.S. GDP has waned as debt growth has surged. U.S. federal debt is currently 102% of GDP – and a 90% debt-to-GDP ratio is the threshold above which GDP suffers.

“You don’t need any better explanation for why this recovery has been anemic,” Sonders said, adding that the Federal Reserve’s open-ended “QE Infinity” easy monetary policy certainly matches that of other central banks around the world.

Yet U.S. consumers’ stresses have eased significantly, Sonders said, pointing to her own “consumer stress index” of stocks, income and inflation. That index has come way down as the recovery takes hold and homeowners are seeing very low mortgage rates and rising home values, she said.

Bright Spots: Housing and Manufacturing

In addition to housing, another bright spot is manufacturing, with what Sonders terms as a “renaissance” biased toward energy and autos. For every 100 jobs created in petroleum refining, additional related jobs created equals 1,190, she said. Manufacturing is showing signs of coming back to the United States as worker wages are flattening; China’s wages are increasing at a rate of 160% while the U.S. is a negative 3%.

“The economy is actually creating stuff and not just paper wealth,” Sonders said.

And now here’s the contrarian good news for investors: “The biggest rallies come when economies stink,” according to Sonders. She reminded attendees at the conference that even though the concept of diversification has gotten a bad name during this period of “risk-on/risk-off” volatility and market correlation, diversification nevertheless remains crucial in volatile macro times. The cycle still favors a combination of asset classes, plus Sonders predicts an upcoming period of stable economic growth.

In introducing Sonders at the conference, Morningstar fund research director Scott Burns mirrored her thoughts on diversification, saying that allocation matters greatly now – and that exchange traded funds are a good match for the current low-return economic climate, where “cost matters even more.”

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Check out complete coverage of Morningstar ETF Invest Conference 2012 and in-depth ETF news at AdvisorOne.

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