Liz Ann Sonders is senior vice president and chief investment strategist at Charles Schwab & Co. Prior to joining Schwab in 2002 she was a managing director at U.S. Trust.
Harlan Levy.: Was the January payroll report and the drop in the unemployment rate watershed events?
Liz Ann Sonders: It was unambiguously positive numbers nearly across the board.
One of the sports that has become popular recently has been nit-picking the jobs numbers, the skeptics going in and finding the "yeah, but." Last month it was, "Yeah, but over 40,000 of the jobs created won't last," or "Yeah, job numbers were up, but hours worked were down." It's been easy to find fault with the numbers in the past. It's much harder to find fault with this number - across-the-board gains, with the exception of government, although frankly I think most people think that's a good thing. Hours worked were up. Wages were up. Private sector jobs were across the sectors. The unemployment rate came down.
Of the two surveys to create the monthly jobs number, the household survey has been leading the payroll survey. Household employment was up 631,000 in January. That's a huge number. You also have to pay attention to the fact that he household survey tends to pick up people who have become self-employed or who started a business and small businesses that aren't picked up in the payroll survey, which tends to capture larger companies, and we know that's where we've been lacking job creation. Where our economy tends to have its greatest job creation is in the small business sector, and it's in that area where we're starting to see some life.
H.L.: What do the job numbers and lower jobless rate say about the U.S. economy?
L.S.: It says it's starting to become self-sustained. What I think is happening is we are at the beginning of the second phase of recovery. If you think back several months ago, everyone was talking about a double-dip recession. I think we're having a double-recovery, not a double recession, where the first part of the recovery from mid-2009, when the recession ended until recently was the natural coiled-spring inventory rebuilding, the natural math of coming out of such a deep retrenchment. Then we paused for a little bit to digest some big factors in the first half of 2011, like the huge spike in oil prices, the tsunami and earthquake in Japan, which wreaked havoc with the whole auto parts supply chain, the epic weather events that occurred in the first half of last year which affected food prices. Food pricing is a big deal. You have to remember that it was rising food prices that really represented the genesis of the Arab Spring. We think of it as an annoyance if we go into the supermarket and have to spend more for milk or eggs or beef, but in the emerging world, where food is a big portion of their consumption basket, if you get a major food inflation problem it's big. And then of course there was the disaster that was August with the debt ceiling negotiation, and the unbelievable crush to confidence that I think was largely driven by politics, and the S&P downgrade of U.S. debt.
This was the retrenchment. Confidence plunged. People asked, "Are we going into recession?" Businesses went into a temporary lock-down mode. Now we're pulling out of that. I don't want to say we're off to the races again, because I don't think we're going to have really robust growth. It's not likely in a deleveraging environment, and the fact that we're still dealing with this debt problem in the U.S. But I think we're in the next phase of the recovery that is a little bit more self-feeding that improves confidence and improves spending, which increases demand, which makes businesses hire again, and you get a positive circle.
H.L.: Do you think we will get a robust recovery?
L.S.: It's unlikely we'll get a really strong recovery, and that's just a function of the debt cycle we're in. What history shows very definitively is that when government debt grows to more than 90 percent of Gross Domestic Product, not just in the U.S. but pretty much in any country at any time in the last 200 years it's very hard to get strong economic growth. It's just a depressant to growth. The 2008 crisis unleashed massive deleveraging on the part of the private sector, which I think is well on its way, but only recently now is it being forced on the public sector here in the U.S., in the Eurozone, in Japan, so we've got a big long-term depressant on growth in coming out of this debt cycle that will put a cap on economic growth. But that does not mean we're mired in no-growth territory. We're likely to see better growth this year than we saw last year.
H.L.: Then how do you see the stock market?
L.S.: It's not a bad environment for the stock market. The stock market historically has had its worst performance just following a boom in the economy. The reason for that is that typically if the economy is booming, like 6, 7 or 8 percent growth, inflation is usually picking up, the Federal Reserve gets tighter, and the stock market looks ahead. The stock market is a discounting mechanism. It's not a reaction mechanism. So if we stay in this 3 percent growth range, and that helps keep inflation at bay, that's a pretty good environment historically for the stock market.
The action in the stock market since the October lows is reflecting what we're now seeing in the economy. That's the natural order of things. The market tends to move in anticipation of what we're going to see in the economy, and, looking back, the market was correct in its rally from early October. Concerns about a double dip were rampant in the September-October period, but the market was telling you it was not going to happen. I was never in the double-dip recession camp, so I'm not surprised by it, but we can now look back and say the market was right in rallying in anticipation of improving economic numbers.
But it was not just the job numbers. The Institute for Supply Management manufacturing survey was very, very strong, and I actually think that is where the real heart of this recovery is going to be - back in the manufacturing sector, which would be nice for a change to have our economy being driven by stuff being produced rather than paper. That was where the last cycle came, housing and finance, financial engineering, and this next cycle is back to the basics of U.S. manufacturing doing well again, exports doing well again. That's an under-told story right now.
H.L.: What about the lousy housing market?
L.S.: Actually, every statistic, with the exception of prices, has probably already broadly bottomed. Pricing tends to be the last thing that turns, and I don't think it will be any different this time. Many other metrics for housing have already shown signs that the bottom is already in, more definitively for new homes than existing homes, because existing homes is the category in which foreclosures still sit. There will continue to be a greater amount of pressure on the existing-home side versus the new-home side until we work through this foreclosure pipeline.
The other thing you have to be careful about with housing is from the early 2000s until the recent period you could look at housing as a singular thing. You could ask, "Has housing bottomed?" or "Has housing peaked?" or "What's going on in housing?" as if housing was a monolithic national thing. To some degree that was the case as the bubble was inflating, and the tide was lifting all boats, and you could analyze housing in a national way. When the bubble burst, the tide went out and took all boats with it, and the crash was across the board. Now I think we're back to the pre-bubble era where housing is more local than it is national, and you get big divergences, depending on what's going on in the local economy. Silicon Valley is booming again in terms of housing. Why? Because their economy is booming. New York City is picking up again. Detroit saw some of the best sales increases percentage-wise because the auto industry has turned around and is starting to grow again. Then you have places like Las Vegas and parts of Phoenix and parts of Florida where you don't have any major economic drivers, and they're still dealing with way too much inventory, and the pressure is still on. Now if you're studying housing you have to look at it regionally and not nationally.
H.L.: On March 20 Greece isobliged to redeem 14.5 billon Euros in debt. Isn't that unlikely, and isn't Europe facing another bump in the road to coming to grips with the sovereign debt problems?
L.S.: It's unlikely unless there is a definitive deal between Greece and its private creditors. They're certainly working toward a solution. My best guess is when you get closer to the deadline, both parties will come to an agreement, and it will probably be with a bigger haircut than what is currently speculated, but it is still a risk. If there is no agreement, and Greece defaults, and the default is disorderly, then that's a chink in the bullish case here, no question about it. But I think there's a greater chance that some sort of deal gets done.
Meanwhile, our market and confidence recently appear to be a little bit less at the mercy of any new thing coming out of Europe, which is very different from what was the case last year, where our market was almost completely at the mercy of what was going on in Europe. It's a function of better economic news here and other things investors have to concentrate on and the fact that what the European Central Bank did with their latest refinancing operation, its Long Term Refinancing Operation, really eased a lot of the liquidity part of the crisis that had gotten pretty acute, which led to concerns that major banks were going to fail, or you'd get a Lehman-type disaster, but the liquidity crunch at least temporarily has been eased because of what the European Central Bank has been doing. It doesn't fix the sovereign problem of a place like Greece, but the pressures and the risk are not quite as acute as they were a couple of months ago, and that has allowed at least a bit of some breathing room, so the market can focus on other things rather than Greece.
H.L.: How much does the bitterly divided Congress affect the U.S. economy and the stock market?
L.S.: It's ugly. It's going to stay ugly. It's going to be an ugly election season. The approval rating of Congress in the last poll I saw was 11 percent. I'm surprised it's that high. I'd like to know who the 11 percent is who think they're doing a good job. Maybe it's friends and family.
But the ability of that to affect confidence, psychology, and the markets, as it did last August is diminished. I think we're getting used to it. The August debt ceiling debate -- not that it came out of the blue, not that everybody was playing well in the sandbox and all of a sudden the left and right decided to go into heated battle with each other -- that's been going on for a while, but just how contentious it became, just how public it became, and S&P's reaction to that, its downgrade, was a bit of a shock factor for the market.
The market tends to have its biggest moves on things that are a surprise, not things that are well known. Now there's almost an immunity to the absurdity that Washington has become, and whether it's investors or business leaders, they may be even at the point of saying, "Look. That is the way it's going to be, and we can either be frozen by it, or we can get back to the business of investing or the business of hiring, et cetera, and that's the environment we're in."
I don't expect any easing of these tensions any time soon. I just don't know if it has the same kind of acute impact on the market or the psychology of the public or investors, specifically, as it did last year.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GE, AAPL over the next 72 hours.
