US Economy Already in a Recession, How to Invest: Charles Schwab

The US economy is already in a “rolling recession,” says Charles Schwab’s Liz Ann Sonders.
Sonders believes investors should emphasize factor investing over picking sectors.
Investors should also stick to quality assets and consider overseas investments.
The timeline for the next recession may be the biggest topic of debate amongst investors right now. Some forecast a downturn on the horizon, while others believe that a healthy consumer, slowing inflation, and positive GDP growth have managed to tilt the scales in a positive direction.
But Liz Ann Sonders, the chief investment strategist at Charles Schwab, believes that the US economy is already in a recession — whether it’s been officially declared or not.
“It may not be a traditional one in the sense that we’ve been calling it a rolling recession, and that’s very specific to the pandemic,” she recently explained to Insider. “There’s no question that things like housing and many of the goods categories of the economy are deep in recession — you can’t argue otherwise.”
Some recessions — like the Global Financial Crisis or the 2020 market selloff — occur because of a sudden shock to markets, and when that happens the bottom of the economy falls out all at once. But that’s not the case this time around, Sonders said.
Sonders also believes that a soft landing is impossible. “To me, the best-case scenario is one where we just continue to see weakness roll through the economy, but as different pockets go through their time of pain, other pockets maybe start to stabilize or recover,” she explained.
Near-term pain and volatility to be expected
In the near term, Sonders believes that there’s more downside ahead for forward earnings estimates, which haven’t yet been fully baked into analyst expectations. But she also believes that things under the market’s surface look a lot better now than they did in the early stages of the bear market, adding that equities can continue to do well even if technology is no longer the leading sector.
However, Sonders — a big sentiment watcher — has grown increasingly concerned about rising investor optimism, and would prefer sentiment stay somewhat subdued even when the market rallies so the Federal Reserve doesn’t feel the need to dampen Wall Street’s spirits. She expects more pain and volatility in the near term, especially since the market has become overly beholden to Fed signaling, which is dangerous because the central bank isn’t on any kind of predetermined path.
“I think the best case scenario of everything — just easing as smoothly as the Fed would like to — I’ve got to put a very low probability on it. The needle they’re trying to thread is pretty narrow,” she said. “I think they’re erring on the side of overdoing it versus underdoing it.”
There are no winning sectors
Sonders believes that investors are better served right now by picking stocks across all sectors, rather than picking a sector or two to position towards.
“Until this year you really could invest in that kind of monolithic way,” she said. “I think you want to invest and screen based on factors or characteristics and not have the blinders on at the sector level.”
In February of this year, Sonders shifted to a purely sector-neutral position in her portfolios, since equal portfolio weighting in the current market environment benefits investors by increasing diversification, lowering concentration risks, and reconnecting fundamental factors to prices. Rather than focus on specific sectors, she’s chosen to emphasize a comprehensive collection of factors which includes both growth and value characteristics.
“You don’t want to give up growth opportunities simply because you’re looking for reasonable value,” she explained. “So it’s kind of hybrid growth- and value-type factors, but definitely with a bit of a quality wrapper around them.”
For instance, as earnings revisions trend down and volatility rises, companies with positive earnings surprises and lower volatility will look increasingly attractive, as will companies raising their dividend. As interest rates spike, Sonders is also seeking out companies with shorter duration characteristics — meaning those with strong current earnings and cash flow — as well as those with high cash and low debt on their balance sheets.
At least in the near term, Sonders believes that it’s still important to emphasize quality assets, since the economy is too fragile at the moment for investors to take on too much risk. She also believes that investors who primarily own US assets and have no exposure to overseas equities may miss out on potential returns.
“I think they’re going to be sorry because you often tend to get domestic versus international leadership shifts that occur when you go through these market cycles,” she explained.