“Hard to Fall Out of a Basement” — Liz Ann Sonders Offers Cautious Optimism on Economy and Market– September 25, 2012

Cohen & Company was honored to co-sponsor a recent event featuring Liz Ann Sonders, senior vice president & chief investment strategist for Charles Schwab & Co., Inc. One of the country’s leading financial analysts, Ms. Sonders provided our guests with her view of where the markets and our economy are headed. She focused on the primary areas of the economy, Fed policy, housing, jobs, the markets, and investor sentiment and behavior. Below is a summary of significant themes presented throughout the program.

In general, our recovery has been weak. This is par for the course, according to Ms. Sonders’ presentation, for each recovery since the late 1980s — due in part at least to mounting government debt. We’re experiencing what Ms. Sonders called a “square root recovery.” Essentially we went through a recession, rebounded to close to previous levels, and are currently in a state of leveling off, or slow growth.

Ms. Sonders also touched on the “fiscal cliff” the U.S. is approaching at the beginning of 2013. Not likely to be as severe as the numbers suggest, the fiscal drop off she referred to is anticipated due to hot issues such as the scheduled expiration of the Bush and other tax cuts and emergency benefits, the uncertainty of another AMT patch, etc. As she explained it, “It’s hard to fall out of a basement,” although even a slight drop would likely move the country back into a recession. The “good news” is that since we have not experienced a significant economic upswing thus far, the fall may not be as steep as it looks.

But Ms. Sonders believes there are indeed bright spots to focus on and strong reasons for optimism regarding our economy:

  • The household sector has de-leveraged, so while the public sector struggles with soaring debt, the private sector is doing much better.

  • The manufacturing sector has improved its competitive position in the marketplace, with job growth higher than among non-manufacturing sectors for the first time in over 35 years. Manufacturing and energy job multiples are also very high, producing a significant ripple effect of additional jobs throughout other economic sectors.

  • Credit conditions are improving, albeit slowly.

  • Significant inflation is not expected to materialize in the near future.

  • The Fed has announced open-ended QE3, and we are experiencing easy monetary policy by global central banks.

  • Housing improvement is a key indicator of an increase in jobs, and we are seeing positive signs such as an improvement in mortgage supply/demand, housing affordability at a high, and now rising sales and prices.

The stock market remains a lead indicator of the economy — and the signs here are positive as well. Investor confidence is stabilizing. Even though within recent history a majority of investors have moved in the direction of bonds over stocks, we are seeing U.S. stocks perform well relative to emerging markets stocks. Additionally, cash is high in mutual funds, pension and hedge funds have de-risked, yields are at historic lows and a record percentage of stocks are paying dividend rates above Treasury rates. And while profit margins are peaking, it does not mean stocks will necessarily go down.

But, Ms. Sonders did point out that even with positive market indicators, diversification still remains key in these volatile times, favoring portfolios with a combination of asset classes.