"For 11 years now, Liz Ann Sonders has been the chief investment strategist at Charles Schwab & Co., where from her perch she takes the view that, despite sharp ups and downs, a bull market has been running since 2009—driven by a domestic manufacturing renaissance and budding housing-market recovery.
While her fellow prognosticators have had a tough time predicting the volatile markets, Sonders, 49, has made some prescient predictions over the years: She called the top and bottom of the housing market, as well as the end of the last recession. Her advice these days: Be bullish, but don't go hog wild".
Robert Hunter, the Journal's banking editor,interwiews Liz Ann Sonders.
Q: A rising-rate environment could spell concerns for investors, since historically that has been tougher for stocks, right?
A: Not necessarily. I think you have to differentiate rising rates between the long end and the short end. You have a honeymoon phase in the early stages of tightening, assuming inflation stays in check. When you get to the point where short-term rates start to go up, the first stage of that—and it varies from cycle to cycle—doesn't tend to be bad for the stock market.
It's only when the rise in rates starts to bite and/or the Fed has to continue to raise rates—not because of re-acceleration in the economy but because inflation is starting to take hold—that tends to be more problematic for the market. That's when the market starts to discount the next recession, which is almost always preceded by monetary policy that gets too tight.
Q: There's another critical element here, which is fiscal policy. You have noted that the deficit is trending lower, and we actually ran a surplus in June. Is that a sustainable situation?
A: Maybe not every single month. But looking at longer than a month-by-month basis, the deficit has gone from more than 10 percent of GDP to under 5 percent. I don't think we're on a path to surplus in the near term. But I think that if we could continue to hold the line on spending—you've got a little boost to the revenue side because of changes in tax policy, but most of the boost has come from the economy—and if you continue this trajectory you can continue to chip away at this, and you get into the 2 percent to 3 percent range. That sends a message that there can continue to be a focus on cost-cutting in Washington without it crushing the economy.
Q: But the shrinking of government spending is likely to weigh on growth in the short term, right?
A: It is, but the point is there's enough growth and strength in the private sector to partly offset the drag. There are two sides of that: Some will say we could be growing even faster if we didn't have that drag from the government. That's fine if you didn't still have absurd debt levels. The fact that we know we need to do this and the fact that we have enough growth and cushion in the private sector of the economy, we should start doing it now, because the problem only gets worse down the road.
A question I get all the time is: How do you explain the disconnect between the market and the economy? But a slow-but-steady rate of economic growth in that 2 percent to 3 percent range, accompanied by very, very low inflation, we used to call that Goldilocks.
Q: So is there a case to be made for stocks over the next few years?
A: I lean toward the view that what started in March of '09 was a new secular bull market, not just a cyclical rally in a secular bear market that started in 2000 and is still ongoing. There's no textbook rule of a secular bull or bear market and its starting and end points. But generally the types of things that have been in place during the beginning of secular bulls were in place in March of '09.
Q: If a secular bull started in 2009, how long might it last?
A: Wouldn't I love to know the answer to that question? Secular markets tend to be longer than cyclical markets. The last one lasted for over 18 years. But it had an unbelievable list of powerful forces in support of it—inflation coming down, interest rates coming down, an unbelievable peace dividend, the invention of the Internet, the tech bubble, etc. Most of those are probably not forces at play today. So I don't know that if we look back it necessarily represents that kind of trajectory for those kinds of returns, but it tends to be longer lasting.
That said, some of the biggest drops in history have come during secular bull markets; '87 being a perfect example of that. I try to make sure people understand that doesn't mean the market goes straight up and never looks back. You can have some brutal declines within a secular bull market. But I think we're more likely in that than just a cyclical pop here.
Q: So what is it, exactly, about the market that might make stocks appealing to investors in the next few years?
A: I think valuation is still reasonable. And from an economic-fundamental perspective we are, at least in relative terms, in the catbird seat right now. I am a believer in the industrial and manufacturing and energy renaissance that's happening right now and the implications that has for the relative growth trajectory.
Manufacturing is only 13 percent of our economy, so it's not the elixir that solves all that ails us. Consumers are still 70 percent of the economy, and I don't expect anything resembling a boom there. But we're now getting the business-investment side, continued housing recovery—even in the government sector there may be less drag from state and local spending cutbacks. That gets you to an economic growth rate that's not bad, and in fact, quite not bad from a stock-market perspective, along with structural forces that'll probably keep inflation in check. That doesn't mean we won't have corrections—painful ones—and you could have cyclical bears that crop in. But I'm pretty optimistic about the market.
Q: You mentioned a manufacturing renaissance. How do investors play that trend when many companies headquartered in the U.S. have substantial operations overseas?
A: Smaller-cap industrial companies with a bit more of a domestic tilt and companies that export to the right places. Part of the theme is the end of the commodities super-cycle and what that means for inflation. Commodities are likely to stay low, and that should continue to feed positively into consumer discretionary-type names.We also like technology. What's happening as we look forward from an innovation perspective? Robotics and artificial intelligence. And what are the next exciting things, like what the Internet represented in the late 1990s? Industrials, consumer discretionary and small caps are key ways to play this industrial manufacturing renaissance theme.
Q: High-net-worth investors who have sought refuge in hedge funds are finding that the boom is petering out. Why have hedge funds lagged so much in recent years, and what should people who are inclined to invest in those presumably less-volatile but speculative instruments do?
A: There are still some big players in the hedge-fund universe. We know who they are—they have unbelievable track records and are extraordinarily good at what they do. But there's just a lot more funds right now, and I think that dilutes the talent, and they're not necessarily representing what they were when they first started. Even the term "hedge" doesn't necessarily apply. In many cases, these are just money managers. They're not necessarily hedging anything. And when you look at the typical fee structure associated with these things, there's just not enough return on top of that to match a traditional equity player.
Q: Investors have also been watching the housing market, which has fueled the economy's recovery—but how sustainable is that?
A: I think the worst is definitely behind us. Recoveries from a burst bubble, whether it's as recently as the tech bubble or the Nikkei stock market or crude oil—whatever it is—they don't tend to be V-bottoms. You tend to get a very clear bottom, but then it tends to be sort of a choppy, upward slope, and that's where I think we are.
The initial percentage numbers are huge because you came off such a depressed base, and we're going to have volatility as rates go up. So far, the dislocation has not been severe. It has hit things like refinancing in a huge way—when you get a full 1 percent spike in yields, "refis" kind of dry up. Purchase applications for mortgages also got hit, but nowhere near the degree that refis did. Obviously home prices have been very resilient. New-home sales have been weaker, but that's mostly because there's been no inventory—there's been no building.
Q: So what should investors be looking at in this stage of the housing recovery?
A: One, make sure you look inside the details of the numbers, and not just at the headlines, because some of the weakness from a sales perspective has been almost all to do with the fact that there's no inventory. That's a good reason why sales might be weak, as opposed to demand drying up.
Two, we're back to a more normal environment. When the bubble got inflated, the tide was lifting all boats. You couldn't look at real estate monolithically. When the bubble popped, the tide went out and took all the boats with it. Now we're going back to real estate being local.
Q: What's your take on the second homes market now versus several years ago? Is it healthier? Less healthy?
A: I can give you a personal experience. My husband was dying to buy a place in Florida from as early as 2003 and through '06. People who have been at Schwab a long time know that I was as bearish as they get on housing in '06. I just kept saying absolutely not—this thing is just an accident waiting to happen.
Spring of '09 came, and that's when I was getting more optimistic about the stock market and thought housing probably had hit its worse and said, OK, now we can look. So we bought a house in the summer of '09. We stole it, in relative terms; it's more than doubled now. That market is in a veritable boom right now. And it's not investor dollars coming in. It's not Blackstone's money coming in. It's people buying homes.
Source: the Wall Street Journal
