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Liz Ann Sonders, Managing Director, Chief Investment Strategist, Charles Schwab & Co.

Portfolio > Economy & Markets > Economic Trends

Liz Ann Sonders: 3 Indicators Advisors Should Watch Now

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The danger of a global recession certainly has risen due to the pandemic and now the Russian invasion of Ukraine. Europe is at highest risk with its current energy crisis, Charles Schwab Chief Investment Strategist Liz Ann Sonders told ThinkAdvisor in an email interview.

Also, expect the Federal Reserve to “front-end load” rate hikes as it has admitted to being behind the inflation curve, she says.

In our ongoing VIP series, Sonders told us what economic indicators advisors should keep a close eye on as the economic upheaval continues, and that investing in quality still makes sense.

She added that advisors should especially focus on strong free cash flow, low debt levels, strong balance sheets, and positive earnings revisions:

What are two to three key economic indicators investment advisors should be watching right now, especially in relation to client portfolios? Why? How should advisors & investors use this information?

  1. Leading Economic Index (LEI) from The Conference Board — focus on the trend of the sub-indicators as well as the year-over-year change of the overall index.
  2. Yield spreads — especially look for further narrowing of the 10-year/3-month spread following recent, albeit brief, inversion of the 10-year/2-year spread.
  3. Leading labor market indicators like layoff announcements.

Consumer expectations for business conditions are weak and have a worsening trend. Your note in March reported that several factors may account for this glumness even when almost all other LEIs and CEIs are fair to strong. Is this down mentality mainly due to “transitory” factors, i.e. pandemic, Ukraine war? Or how much of this is inflation-driven?  

High inflation is causing angst among consumers, especially with regard to future purchases, wage growth opportunities and income growth. And the Russia-Ukraine conflict is certainly contributing to the angst. Inflation has become “counter-cyclical,” meaning that high inflation is putting downward pressure on demand and growth.

Has the Russian invasion of Ukraine heightened the chance of a global recession? You noted prior to the invasion that inflation will likely decline later this year. Do you believe this is still the case? In your view has the Fed taken the right steps? 

Yes, it has certainly increased the chance of recession in Europe given the energy crises being felt more acutely there.

Some components of inflation could begin to recede, notably from base effects and pent-down demand on the goods side, but headline inflation could remain high if oil and food prices don’t recede from the possibility of easing tensions between Russia and Ukraine.

The Fed has admitted to being behind the inflation curve; hence there is a growing likelihood they “front-end load” rate hikes with one or two (or more) 50 basis point hikes.

The notion of a “Fed put” tied to market volatility should probably be put to bed. The Fed has to act aggressively on inflation, even if volatility spikes again and/or market weakness becomes more pronounced.

The impact of the war on commodities markets, especially energies and grains, has been dramatic. How quickly will demand find new markets to level out these prices to keep the global economy from going into recession? 

There are already additional supplies coming to market from the United States and Canada, but they’re not equivalent to the supply loss from Russia. In the United States and around the world, more investment is likely to go toward shoring up energy supplies of both the fossil and more green varieties.

U.S. agriculture could benefit, given the high productivity of U.S. farmers. It’s already the case that a third of U.S. “calories” farmed are exported. Sectors like Energy and Basic Materials, and industries like Defense, should continue to benefit. However, in the case of Energy, although it remains under-owned in portfolios, it suffers from over-bought characteristics as well (net: don’t chase on upside).

The VIX is still high but not close to its 2020 spike. In February you noted that quality stocks were the best option for investors, especially due to continued volatility. Is this still the case? Are any sectors stronger than others? 

The latest relief rally has had a lower-quality flavor to it, with nonprofitable stocks outperforming profitable stocks. Some of the strength is likely tied to short-covering and/or bottom fishing.

We believe quality still makes sense; that is, advisors and investors should focus on factors like strong free cash flow, low debt levels, strong balance sheets, and positive earnings revisions.