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Hello, and welcome to this special edition of the Schwab Market Snapshot. It’s January
20th and I’m Randy Frederick.
Well, it seems like we’ve just barely started, but, so far, 2016 has just gone from bad to
worse. So, today, I’m speaking with Liz Ann Sonders, Schwab’s Chief Investment Strategist,
to get her always unique perspective on this crazy market.
So, Liz Ann, we thought 2015 was a rotten investing year, but 2016 has been so much
worse, and we’re only three weeks into it. From your perspective, what has caused 2016
to be one of the worst starts to an investing year ever?
Well, what’s interesting is a lot of the most notable causes, I think, to what’s
been happening so far this year are nothing terribly new. We really saw many of those
erupt and contribute to the correction, the last correction we had, which was in August,
and they sort of reared their heads again, I think. A lot of attention, of course, to
the fact that this weak period happened to correspond with the beginning of the year,
so that generates additional concerns, whether it’s concerns about the so-called January
Effect, what they may say about the rest of the year? What has the history been of weak
starts, is it telling about the rest of the year?
And I think you have to take some caution about that, because, yes, it was the worst
start to a year, meaning the first two weeks of the year. But if you look at maybe the
top five worst starts to the year, with the exception of 2008, which was obviously an
ugly full year, there’s a much greater likelihood, based on history, that the market rebounds.
We also have Fed uncertainty, and I think that’s maybe a newer factor. We eliminated
the uncertainty about when will they raise rates for the first time. That happened in
December, but now there’s uncertainty about where do we go from here? And, also, we are
not too far off the typical kind of corrective phase of volatility that you see based on
history once the Fed moves off whatever the low rate was and initiate a hiking cycle.
So, in many ways, this is not terribly unique.
Well, since you mentioned 2008, let’s talk about that a little bit. There are some pretty
well-known, pretty respected market forecasters out there who are comparing this to 2008.
But you’re not in that camp, right?
No, we’re not in that camp. In fact, if we were going to use a year, maybe, as an
historical analogy, we think it’s probably more something like 1998, where you had a
lot of turmoil in the currency markets. You ended up having a pretty significant correction
in the equity market, but it wasn’t a force that pulled down the US or global economy
with it.
And I think, though, key differences between now and 2008, one would be leverage in the
financial system, which is a fraction of what it was back then, we have a much healthier
financial system; the weakness in China doesn’t have the tentacles into the global financial
system; and then maybe most interesting to ponder is the fact that when you think about
2008, at the heart of it was the crash in housing prices. And most investors, most consumers
back then, were very leveraged, too, they had exposure in the wrong direction to the
housing market. Now, when you think of one of the big causes of this downturn, it’s
the crash in oil prices, but, for the most part, investors, certainly consumers, are
actually on the right side of that trade, if you want to use a market analogy, they
benefit from declining oil prices.
I think the problem we’re dealing with is that the negatives associated with the crash
in oil, and not just oil, but other commodity prices, that that, as a headwind, is moving
with a faster speed than what we still believe will be the offsetting positives that come
to an economy that’s very consumption-oriented. So, we think we’re going to get the offsets,
we just haven’t gotten them yet, but we don’t think that this is akin to 2008.
So it kind of sounds like it’s a little bit of a timing issue. But separate from the
stock market, there also seems to be a lot of people talking about the potential for
an economic recession, but you’re also not in that camp. So what is it that you see that
everyone else isn’t seeing?
So we’re not saying that the risk of recession is nil, and it is up, arguably, but not to
an extreme level. We do have a manufacturing recession, but that’s 12% of the economy.
The other 88% that is services/consumer is still doing fairly well. The leading indicators,
the Index of Leading Indicators, has not rolled over. It would be the first time in history
that a recession came without the leading indicators rolling over. Recessions aren’t
caused by a decline in the stock market. The stock market can tell you there’s a risk,
but I don’t think that’s the case this time.
Normally, recessions come because there’s excesses built in the economy, often excess
in terms of inflation, excess in terms of monetary policy. We don’t have that. It
would also be the first time in history we got a recession after a plunge in oil prices.
Normally, what precedes a recession is a surge in oil prices. So some of the market-based
indicators are telling you recession risk is up, but, more broadly and collectively,
looking at the indicators, we still think the risk is relatively low.
Okay. Well, since you brought up the crash in oil prices, what, exactly, does this crash
in oil prices say about the health of the economy, or, really, about the health of the
US stock market?
Well, it’s interesting. You know, we’ve done the analysis on this, and we certainly
are not in a positon to try to forecast where oil prices go from here, but the plunge has
much more to do with the supply side of the equation than the demand side of the equation.
In fact, global demand really hasn’t deteriorated significantly, it’s growing at a less robust
pace than it was, but this really is more a story about a massive increase in supplies.
And one of the adages always used is the cure for high prices in terms of oil or commodities,
more broadly, are high prices, and that it brings on additional supply, which eventually
brings the price down.
And we think, at some point, maybe not imminently, we will get to the point where the cure for
low prices is low prices, where you start to see a pulling in of supplies. You may actually
see an improvement to demand because prices are so low. So I think the story here in terms
of oil has much more to do with supply than it does with an indication that global demand
is falling off a cliff. We just don’t see that.
Yes. Well, that makes a lot of sense. Well, you always kind of have a very unique perspective
on this. So can you share with us some of the other things that you’re keeping an
eye on that help you gauge the health of this market?
Sure. Well, you look at a number of different technical factors. I’m not a technician
in a traditional sense. That’s more the hat you wear, Randy, than mine. But, certainly,
on many traditional technical metrics you could argue that we are either in or getting
pretty close to oversold territory. When you look at sentiment, sentiment has really seen
the pendulum swing toward excessive pessimism on the part of individual investors, newsletter
writers, so you are starting to get to those extreme that in the past have allowed you
to find a little bit of a bottom.
I think one of the concerns, though, and one of the factors that hasn’t quite turned
for the better yet is valuation and earnings. So earnings growth is still negative, largely
pulled down by the energy sector, and valuations are only a little bit cheaper than long-term
historic norms, but in an environment where you still have earnings contraction. So I
think from that fundamental perspective, they key is really seeing a turn in earnings. And
I think stability in oil prices would allow that to start to happen, and then I think
you have a better valuation story.
You know, in these times it seems like short-term volatility, it’s very difficult to be an
investor and let your emotions… you know, keep your emotions out of it. So people always
get sort of hung up on these short-term moves, they get kind of panicked or something like
that. What are some of the things that we always remind our investors to keep in mind
during these trying times?
Well, it’s funny, we have this dog-eared report that I initially wrote back in 2008,
during the heart of the financial crisis, called ‘Panic is Not a Strategy.’ And,
unfortunately, we’ve had to edit it and dust it off a few times since then, most recently
until now, back in August. And I think a lot of the tenets of that hold true, which is
if you think about it, and use just August as an example, if during that mini flash crash
you had, if you just panicked and sold everything, you would have missed the huge rally on the
upside again in October. There’s no way to perfectly time the exit and the entry,
which suggests to investors you need to ride through it. The key point is having discipline.
Make sure you have a plan. That plan should be relevant to you as an investor, your time
horizon and your risk tolerance. And then stick with that plan, which often involves
rebalancing. So when you do get big moves in the market, your portfolio then tells you
maybe you ought to do something. Which, more often than not is going to mean you’re adding
to asset classes that maybe are underperforming, and that kind of keeps you on the right side
of things. Ultimately, though, diversification, and that discipline around it, is going to
help you ride through some of these more difficult periods of time, like the one we’re in right
now.
Yeah, and it seems like sometimes the right thing to do is the thing that feels the most
uncomfortable or is the most difficult to do.
Well, Liz Ann, this has been very helpful. Thank you for sharing your insights.
I know if you’re watching this video, you’ve got questions. I think we helped answer a
few of them, but if you’ve got more, please give us a call, talk to a Schwab investing
professional. And you can read a lot more from Liz Ann in the Investing Insights section
of Schwab.com. You can also follow Liz Ann on Twitter @LizAnnSonders, and you can follow
me on Twitter @RandyAFrederick.
So we’ll be back soon. Until then invest wisely. Own your tomorrow.