Recession hangover blurs solid fundamentals, Schwab strategist says

Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. Inc., feels almost apologetic about being bullish.

“Pessimism is the most vocal story” right now, she said last week at an investment conference for financial advisers.

Bearish views arising from a downturn such as the Great Recession tend to linger far longer than the fundamentals would dictate, she said.

“That’s the period we’re in now,” Ms. Sonders told attendees at the Investment Management Consultants Association’s Advanced Wealth Management Conference in San Francisco.

But pent-up demand, strong corporate profits and reasonable equity valuations make a better case for being optimistic about the stock market, she said.

Business investment will be the primary driver of economic recovery, not the consumer, Ms. Sonders said.

“I’m amazed there are people who think a double-dip [recession] is in the cards,” she said.

Leading economic indicators in the U.S. peaked in April, causing concern, Ms. Sonders said. But leading indicators always peak after a recession ends, which “always sparks talk of a double dip.”

Ms. Sonders acknowledged that the rebound so far is “subpar,” held back by the overhang of debt, especially on the consumer side.

Debts and deficits will diminish growth, but stocks have flourished in periods of modest growth, she said.

“The big issue is the confidence crisis,” Ms. Sonders said.

Surveys of business leaders still show a fair amount of uncertainty. But the mood can change quickly, Ms. Sonders said.

“You never know where the spark will come from,” she said.

A 6.1% loss in jobs from the recession was an overreaction, Ms. Sonders said. Based on past recessions since 1950 and their associated job losses, the 2008-09 job losses should have been 4.1%.

Ms. Sonders predicts that job growth may snap back as employers finally gain confidence in the recovery — 17 months after the economic downturn ended. “Over the last three recessions, the unemployment rate peaked a year after the recession ended,” she said.

Although she thinks that stocks look reasonably valued, Ms. Sonders cautioned against bonds.

“There’s not a lot of value in fixed income,” she said. Investors have chased performance, and low yields have forced investors to go out on the risk spectrum, “possibly at the very worst time.”

When the Federal Reserve in-creases interest rates, bond investors will be hurt, but stocks might benefit from the perception that deflation risk has abated, Ms. Sonders said.

E-mail Dan Jamieson at [email protected].