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?
- 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.
- 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.
- 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.