Happy Saturday, dear readers. I’m senior reporter Phil Rosen. Just finished your weekend reads – and there are a few doozies on deck.
Today’s newsletter features my conversation with Charles Schwab’s Liz Ann Sonders, and why she thinks the economy is already in a recession.
Next, we’ll explore some of the best reads from Insider’s award-winning newsroom.
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Liz Ann Sonders is the Chief Investment Strategist at Charles Schwab. This conversation has been lightly edited for length and clarity.
Phil Rosen: Can you explain your assessment of a “continuing recession” in the US economy?
Liz Ann Sonders: Typically, when you go into a recession, everything kind of gets hit at the same time. This was certainly the case with the COVID recession and the financial crisis.
But now, specific categories have entered recession territory, such as housing, consumer confidence, CEO confidence or measures like the inverted yield curve. But you have this positive offset, because of the pent-up demand that still finds its way into services and keeps the job market afloat.
Eventually, you’ll see some rolling there, in part because that’s precisely what the Fed is trying to do, weaken the labor market so that inflation continues to decelerate. I think it’s only a matter of time before many segments that are not yet affected are affected – a situation where weakness shows up.
How far do you think the slowdown will extend?
THE ACE: Some pockets were affected, you saw quite deep contractions. But overall, I would expect that we could avoid a major deterioration in GDP, because of the slippery nature, but also because we don’t have the kind of imbalances that we had over the period 2007-2009.
When the real estate crisis happened, it destroyed the entire global financial system. But there’s none of that now, so that should limit GDP contractions, barring a black swan event. But it might last longer due to rolling nature.
How do you see the Fed navigating in the coming months?
THE ACE: The Fed is trying to thread the needle of the weaker labor market perfectly, trying to crush job offers without crushing employment. It’s always tricky. Either they overshoot, and you have a more severe contraction in the economy, or they declare victory too soon on the inflation front.
Because we haven’t seen a big enough easing in the labor market, you have a sort of 1970s type story. But the conditions surrounding inflation today are quite different from those of the 1970s. 70. What really caused Volcker in the 1980s to have to “pull a Volcker” and raise rates was because of the mistake of the 1970s – when the Fed thought inflation was under control, it relaxed its policy, it reignited again.
So the Fed wants to avoid the bumps that led Volcker to do what he did. They want the medicine to be applied more consistently.
Short-term difficulties in the labor market create better long-term economic prospects.
How will stock market investing change in 2023?
THE ACE: There are significant shifts that started this year and will continue into next year, and one is that fundamentals have reconnected to prices. Equal weight [stocks] wear much better in relation to the ceiling weight; active managers are having a much better year than in the past. This is largely because there is a risk-free rate again.
Investors should focus on “what’s missing”, in the macro sense. In other words, for example, we are in an earnings downgrade environment, which means forward earnings estimates are falling, so you want to look for companies that have positive earnings surprises. profits.
We are not in an environment where making a sector call or two will be the way to do well. It’s going to be more fundamental-based, and I think that’s actually a positive backdrop, although we’re still in an environment where volatility is likely to persist, because what I think is not yet priced in market is the new earnings deterioration.
Can you share a book recommendation?
THE ACE: I have my favorite book of all time, “Reminiscences of a Stock Operator”. It’s the first book I was given when I started this business in 1986, and it’s the one I recommend all the time.
It really helps people understand how psychology comes into play as a bigger driver of what the markets are doing than any other fundamental.
And your favorite market quote?
THE ACE: I think that’s what John Templeton is best known for: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
Read the full interview with Liz Ann Sonders here.
What did you think of Sonders’ ideas?
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Organized by Phil Rosen in New York. Feedback or tips? Tweeter @philrosenn or email email@example.com
Edited by Max Adams (@maxradams) At New York.