There are more positives than negatives in the current economy, but the negatives should not be overlooked, Liz Ann Sonders said today speaking at an Investment Management Consultants Association conference in Atlanta.
Ms. Sonders, senior vice president and chief investment strategist with Charles Schwab & Co. Inc., cited public debt as the “top of my list of things I have concerns about.”
“The answer to deficit problems is growing the economy,” she said. “You can only do so much with taxes.”
Ms. Sonders described herself as optimistic about the economy, but regarding the stock market, she said, “You have to wonder how much further we can go; at some point, we have to concede that the market will look ahead” to a less positive scenario.
“The private sector is doing its part, and household debt is contracting, but we're really only starting to make a dent in household balance sheets,” she said.
One example of the challenges still facing the consumer is the housing market.
“In the past, people were getting a mortgage for 6% on a house that was appreciating at 17%,” she said. “Now they're getting a mortgage for 5%, but the value of the home is declining at 15%, which makes it a 20% real mortgage.”
Ms. Sonders said her research challenges some long-standing notions regarding economic recoveries, including the idea that an increased consumer savings rate is bad for economic growth.
Despite logical assumptions that a pullback in spending by consumers, which represent 70% of the economy, will negatively affect the financial markets, the opposite has been true, Ms. Sonders said.
Over the past 44 years, when consumer credit contracted by more than 5.5% on a year-over-year basis, the S&P 500 had an annualized gain of 11.6%.
By contrast, when consumer credit increased by more than 8.5%, the S&P 500 gained just 0.8%, Ms. Sonders said.
“In the past, private-sector deleveraging has been the best environment for stocks,” she said.
Ms. Sonders also challenged those who argue that a rally in gold means inflation is looming.
“The only time we've had a period where the rising price of gold was accompanied by inflation was in the 1980s,” she said.
On the issue of the quick turnaround of the stock market over the past six months and the relative brevity of the
recession, Ms. Sonders said economic cycles will start to become more concentrated.
“You can't regulate away or learn away a crisis, but the cycles will be more concentrated,” she said.
