November 10, 2013

Schwab’s Sonders: Market Remains ‘Quite Cheap’

Confirming her bullish bias, Schwab’s chief market strategist makes the case for an American resurgence

Liz Ann Sonders speaking at Schwab Impact last year. Liz Ann Sonders speaking at Schwab Impact last year.

Charles Schwab & Co.’s chief investment strategist, Liz Ann Sonders, gave a generally positive address Sunday evening to Schwab Advisor Services' assembled advisors on the U.S. economy and markets.

She jokingly bristled over those who call her a “perma-bull,” though she admitted to having been generally bullish “since 2009.” Following Potomac Research strategist Greg Valliere’s politically focused speech at Schwab Impact 2013’s preconference session in Washington, Sonders delivered her assessment that “the market is quite cheap,” and that its outperformance last year and this one was “primarily because of corporate earnings” rather than the consensus view that the Fed’s quantitative easing was the prime driver of strong market performance.

Looking at the economy now, she said that the third-quarter GDP report was “better than expected,” noting in particular that consumer spending’s share of GDP fell in the quarter to 68% from the 71% reported in the second quarter. However, she also said that the government’s share of GDP remained stubbornly high, and that “government spending still needs to be deleveraged.”

She also argued that in assessing any economy’s growth pattern, the most important measure was not so much the level of growth as it was the trajectory of that growth. She then presented a chart that showed that in 2013, the growth trajectory for the U.S., Japan and the eurozone was significantly improving, while deceleration was just as clearly evident for the BRIC subsegment of the emerging markets: Brazil, Russia, India and China.

Echoing Valliere’s earlier speech, she agreed that while Janet Yellen, who faces hearings on her nomination as Federal Reserve chairwoman on Nov. 14, is “dovish," "she’s no pushover” — if consensus can’t be found among the FOMC members, “she may step in and decide herself.” In an interview on Monday, Sonders elaborated on how Yellen might perform as Fed chair. While she prefaced her remarks by saying her insights came from those who knew Yellen, not from direct knowledge, she said while the Fed nominee is a consenus builder, she may not let the consensus-building process go on as long as Ben Bernanke was wont to do. "She may make a decision faster," Sonders said, and while she won't "necessarily be Greenspanish" in making a decision without a broad consensus within the Fed, that willingness to decide may well "offset her dovishness."

Again agreeing with Valliere, Sonders said that she did not expect tapering by the Fed of its Treasury purchases “to start until the beginning of next year.”

She then listed four main signs of economic optimism for the U.S.

The first is the nation’s improvement in surveys that assess the “ease of doing business” in a specific country. The U.S. has risen to fourth place in those surveys, while China is mired in the high 90s.

The second cause for optimism is that the total cost gap, and the labor gap, is “significantly narrowing” between the U.S. and its emerging-market competitors.

The third cause for optimism is that by 2015, the U.S. will have an export cost advantage of some 5% to 25% over many of its major trading partners, including the U.K. and Germany.

Finally, she sees hope in U.S. manufacturing prowess, noting that manufacturing as a share of total GDP is growing. In Monday's interview, she pointed out that manufacturing still accounts for a fairly small percentage of U.S. GDP, about 13%, but that she has been following the trend of manufacturing returning to the U.S. for years, supported by a series of research pieces on the subject from the Boston Consulting Group.

All those signs, she said, suggest a “new U.S. secular bull market relative to the emerging markets,” leading toward a “multiyear period when the U.S.” regains advantages over EM countries.

That doesn’t mean that she doesn’t see areas of concern. In addition to the need to bring down government spending as a percentage of GDP, she expressed concern over the “short-term frothiness on confidence,” which “could suggest a “short-term pullback” in the stock market, though she said such a correction “could be healthy.” Why would a stock market correction be healthy? In the interview, she said that corrections "keep euphoria in check," and "allow for the slow grind forward" which sustains a bull market. "Booms don't tend to end well," she said.

The resurgence in U.S. manufacturing will face some headwinds by a lack of skilled workers for factories, but she called that a "fixable problem," noting that not only institutions of higher education but companies themselves are devoting significant resources to vocational education programs with a "total focus on skills."

Finally, while she said she saw some signs that banks were beginning to show more eagerness to lend money, she remains worried about the "big gap" between the level of bank deposits, which have been “soaring, thanks to the Fed,” and the low level of bank loans, which have remained flat at best while deposits have sharply increased.

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