Market volatility is likely going to continue to be high and the next potential driver of it may be the second-quarter earnings season, according to Liz Ann Sonders, managing director and chief investment strategist at Charles Schwab & Co.
While many economists and other market experts predict a recession may start in the U.S. this year or 2023, Sonders argues we may already be in one, based on how the National Bureau of Economic Research calculates the starting month of a recession.
Via email, we asked Sonders a few questions about the state of the market and where she thinks it’s headed.
1. What’s your view on where volatility is headed in Q3 and Q4 and why?
Liz Ann Sonders: Volatility is likely to remain high, with bouts of extremes (in both directions). The next potential volatility-driver could be second quarter earnings season, with the expectations bar likely set too high (a stark difference relative to the past two years’ worth of high quarterly beat rates).
The Fed will remain a volatility-driver as well; and assuming labor market data weakens, aggressive monetary policy will highlight the Fed’s tunnel vision with regard to its inflation mandate at the expense of its employment mandate.
2. What are the greatest risks and opportunities for investors in this environment and why?
A key “known” risk continues to be an aggressive Fed; especially the risk that it tightens too much into an already-weak economy. Given the Fed’s heightened focus on inflation expectations, which are more tied than usual to energy prices, the Fed is increasingly getting criticized for targeting headline inflation.
Monetary policy is a blunt tool which can only tackle aggregate demand, leaving the supply side of the economy to adjust based on external forces.
3. What chance of a recession do you think there is today and why, and to what extent has the (equity) market already discounted a recession?