Liz Ann Sonders speaking at a Schwab Impact conference. Schwab’s Liz Ann Sonders. (Photo: Schwab)

Two Charles Schwab investment strategists took the stage at the Schwab Impact conference with a warning that current economic concerns could become more troublesome if they move from trade issues to affecting jobs.

Jeffrey Kleintop’s main message was that the Federal Reserve is no “superhero” and can’t help the economy forever by continuing to cut rates. The key will be watching trade talks with China and a possible deal, and if manufacturing problems spill into the job market. He also worries about consumer confidence being too high, potentially now at a tipping point, and he’s worried that it’s “vulnerable to any pullback in the job market.”

“People say the job market is a lagging indicator and it’s like the trade slowdown, and the manufacturing slowdown, and earnings slowdown and business equipment slowdown, but it’s the next shoe to drop,” said Kleintop, Schwab’s chief global investment strategist. “It is the most important connection to the rest of this, and is the support to the global market which is the consumer.”

This all makes 2020 hard to forecast, especially if there isn’t a China trade deal. However, Kleintop is optimistic that trade relationships with Canada, Mexico, and Japan are strong.

His bottom line is to buy value, not growth, and continue to rebalance.

Another View

Liz Ann Sonders, Schwab’s chief investment strategist, agreed that the trade deal will affect the market, but also noted that there are negative expectations both in third and fourth quarter.

2019 is a better year than 2018, but “we are in a mini-slowdown,” she said, adding that if manufacturing goes down, it could become a real recession.

She noted most leading indicators were in good shape, but could be turning.

She also said “economic surprise” indexes’ recent rise was seen by some as a “legitimate improvement. But what some don’t see in the Citi Economic Surprise Index is it has a higher concentration of lagging economic indicators.” Instead she looks at Bloomberg’s surprise index, which breaks down subsets of indicators, including leading indicators, “and that has been more subdued.”

Regarding global indicators, Sonders said some indicators may mean the worst is past for the United States, “at least at how it relates to the rest of the world.”

She also noted other “soft” data signals uncertainty with the trade war. She says that for the China trade deal, she questions whether that will be enough there to “rein in the animal spirits.” She noted it was hard to see where a trade deal would ignite the capital spending cycle. “Stabilization is best we can hope for at this point,” she said.

The National Association for Business Economists survey asked about the biggest downside risk for the U.S. economy; half of the respondents said trade, Sonders said.

“We have been neutral to U.S. equities the last couple years — which means we’re telling investors to stay in a normal long-term strategic allocation …. But reality it could go either way.”

Impact has been seen more in manufacturing side, “but we have seen some morphing, particularly in the employment channel,” she said.

Plans to hire have ticked up, but keep an eye on small-business hiring, because it brings in more jobs than big companies. “If we start to see an uptick in the unemployment report, that could send a message,” she said.

She cited another Consumer Confidence Report in which consumers were asked “how do you feel right now?” and “how do you expect to feel six months down the road?” She noted that the last reading showed current expectations went up while future expectations went down. This too is a warning, she says although it’s too early to tell.

CEO confidence was down dramatically as well. “The key is keeping it from leaking into the consumer side,” she said.

She finished by showing a chart of smart money vs. dumb money. Right now, smart money — which is almost always right, she said — is more pessimistic than dumb money.