Charles Schwab Chief Investment Strategist Liz Ann Sonders says that she does not think the U.S. will enter another recession, and that some of the negative recent economic indicators may actually be good news for investors.
“We don’t pretend to know what’s coming for the markets in the next couple of days or weeks, as heightened sensitivity could result in continued volatility — in both directions,” Sonders says in commentary written with Schwab’s Brad Sorensen and Michelle Gibley on the firm’s web site. “We continue to believe we’ll avoid a recession due to continued positive leading economic indicators, an improving jobs picture, solid corporate balance sheets and a still-steep yield curve.”
Sonders says that a couple of the poor economic readings we’ve seen recently — the Philadelphia Federal Reserve’s regional manufacturing index plunging to -30.7 and consumer confidence levels remaining very low — tend to be good contrarian indicators for stocks. When the Philly manufacturing index has fallen below -30, the median gain for the S&P 500 over the next year is 22.9%, which is four times greater than any random period of the same length, Sonders says, citing data from SentimenTrader. And the Dow Jones Industrial Average has risen an average of 14.4% annually when confidence is less than 66 on the Conference Board’s survey (which it is now). That’s more than double the average gain when the reading is above 66.
As for Europe, Sonders says confidence is a huge issue, and says policymakers are failing to realize that. “In our opinion, what we’re witnessing in Europe is the inability of policymakers to stem uncertainty, fueling a contagious illness that feeds through to vulnerable banks and countries in a ‘whack-a-mole’ fashion,'” she says. “The mere possibility of a problem — something that could be possible, even if it is not probable — becomes a target. European banks are highly reliant on short-term funding, which is only exacerbating the situation in our view.”
Sonders says European policymakers need to make “large amounts of capital … available to give markets confidence that any potential problem can be addressed, regardless if it’s a problem with a bank or a country”. She thinks that even if policymakers adequately address the situation, growth will be slow in Portugal, Italy, Greece, Spain, and the U.K. She says Schwab is looking toward Switzerland’s “more defensive market” right now, and is looking to shift toward Germany for the longer term, “when there are better indications that global growth will reaccelerate.”