Schwab’s Sonders: Election Gives ‘No Clarity’ on Fiscal Cliff; Townsend on Dodd-Frank

In a post-election conference call on Thursday, two members of Charles Schwab & Co.’s braintrust shared their insights, suggestions and projections for the markets, the economy, taxes, legislation and regulation—including implementation of Dodd-Frank in the 113^th Congress that was elected on Tuesday.

The conversation confirmed that the biggest issue with the election now decided is the fiscal cliff: how Congress and the Obama administration deal with that package of tax, debt and sequestration issues will have a major impact on where the markets and the economy go, and how American investors feel about their own prospects.

To begin, Schwab chief investment strategist Liz Ann Sonders (left) suggested that the election yielded a status quo in the Washington political power equation, which “provides no clarity on the fiscal cliff.” Dealing with the cliff needs to be done, she said, “before we can open the valve to pent-up demand” and grow the economy.  There is a chance for a recession in 2013, Sonders suggested, whose “magnitude” will be based on how we deal with the fiscal cliff. “Recessions tend to come when there have been big excesses” in an economy, but since, she said, “you can’t fall out of a basement,” any such recession would not be severe.

(Sonders will be kicking off the annual Schwab Impact 2012 conference in Chicago with a preconference presentation on directions for the economy and markets on Tuesday, Nov. 13; see the Impact agenda here, including times for keynote speakers Chuck Schwab, Erskine and Bowles, and Alan Alda; and view AdvisorOne’s onsite coverage on our special Schwab Impact 2012 landing page.)

She mentioned that “some pundits think falling off the cliff could be positive,” since it would force government to deal with its long-term secular issues. “It’s not my base case or hope,” she said in referring to going over the cliff, “but it’s one way to see a silver lining” should that worse-case scenario occur. Noting that even the term “cliff” suggests going over it would be “steep and immediate,” in fact the effects “would be spread out,” especially on sequestration and more specifically on defense cutbacks.

While she warned that it’s “generally difficult in dealing with politicians to have specific” predictions of how they will behave, she expects any cliff-avoiding move will be “very 11^th hour in nature” and whether or not Congress and thep president merely give the issue “a kick ahead or go over the cliff,” a deal will likely include “fundamental tax reform coupled with regulatory reform and entitlement reform,” an outcome she said “would be incredibly positive.”

When asked what could boost U.S. consumers’ confidence, she first suggested that confidence is in fact fairly high, helped by the recovery in the housing market. “It’s too soon to tell whether the election will boost confidence,” she said, but “if we see our politicians can get into the sandbox and play nicely,: there is cause for hope. She warned that “we’re not finished with difficult times for the stock market…in the near term there’s not much of a catalyst” for stock growth, and that “we may have more pain.” 

Returning to the fiscal cliff scenario, the markets, she said, “don’t want piecemeal” attempts at reform, but rather to “tackle this in a secular, fundamental way,” that would improve American’s confidence in Congress; and would deliver “ultimate benefits to the economy that would be tremendous.”

That could come from the “coiled spring” she still sees poised in the economy, signified by the “hoarding of cash by companies not seen since World War II” and by rebuilding efforts after Hurricane Sandy, and that recent “positive offsets, not least being housing and, energy, and the trade numbers released today” could yield an increase in third quarter growth of GDP to “closer to 3%”