One on One with Liz Ann Sonders, Chief Investment Strategist at Charles Schwab
Monday, August 20, 2007
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SUSIE GHARIB: Despite Wall Street's positive finish today, our guest tonight says she's still worried about the future, especially the risk of recession. Joining us now to explain, Liz Ann Sonders, chief investment strategist at Charles Schwab and Company. Hi Liz Ann.
LIZ ANN SONDERS, CHIEF INVESTMENT STRATEGIST, CHARLES SCHWAB: Hi, Susie.
GHARIB: Do you see any signs out there that the stock markets are stabilizing?
SONDERS: Well, I think Friday was a good sign and the market does tend to like when the Fed does finally step in. And stock market typically has not performed all that bad during financial crises at the moment the Fed comes in. The real key to a long-standing recovery for the market, though, is ultimately what happens in the macroeconomic environment. The stock market doesn't tend to look at favorably upon a hard landing in the economy. And I think that really holds the key going forward, is how big of a ripple effect this is and will have on the overall economy.
GHARIB: When you talk about the macro environment, you are talking about the economy and as I said when I introduced you, you are worried about a recession. Tell us why.
SONDERS: I think the risks have increased of late. The report that you put out just prior to me coming on here talked about the credit markets really being the backbone for the overall economy and the seizing there up I think calls some long term growth expectations into question. If you look at housing as the root cause of these problems in the overall market, of course, we still have a lot of that in front of us. We have the employment effect in front of us. We still have quite a few mortgages yet to reset coming up in 2008, particularly those that had originations in 2006. And we have the wealth effect. We had the weakness in net worth that came as a result of housing that was offset by a rising stock market. And now we have some volatility in the stock market that may cause some problems in terms of overall net worth, which has both -- both actual effect on the economy as well as a psychological effect. So, there's still some issues ahead of us.
GHARIB: And those issues are all very real, but the flip side of it is people have jobs. The unemployment rate is low and in terms of corporate America, profits are pretty good. Inflation is low. Many analysts come on and say the economy is sound. What do you say to that?
SONDERS: The economy absolutely is sound right now. I'm not suggesting a doom and gloom scenario here, but if you were to look at when we start recessions in the past and where the unemployment rate typically is, it is typically at the low in the cycle. You look at corporate profits and you look at the starting point of recessions. Corporate profits are normally at the high in the cycle. So those are both very much lagging indicators and you can't simply point to those and the health that they represent right now as a guarantee that we're not looking at economic trouble going forward.
GHARIB: Charles Schwab, your firm is sort of a proxy for the individual investor. What's your read on individuals these days in regarding to the market situation?
SONDERS: Fortunately, we're not seeing a lot of panic. There's certainly been slightly more mutual fund redemptions that we're seeing new flows in. But much like with individual investors across the board not just at Schwab, you have seen a heavy bias toward purchases of foreign equities, not U.S. equities. So a lot of action in our market is really absent the individual investor. They have been much more overseas. That's why I think this market environment is so dominated by professional investors and that's part of the reason why you're seeing the volatility that we're witnessing.
GHARIB: So, what do you think individuals should be doing in this environment? Is it smart to be putting your money in overseas markets?
SONDERS: It depends on how aggressive an investor you are. At Schwab, we believe in a strategic asset allocation approach which is long- term asset allocation, not market timing. And if you are far up the aggressive spectrum, then having a decent exposure to international investments does make sense, maybe 25 percent. But that's not applicable across the risk spectrum. For a more conservative investor, given the typically increased volatility associated with the international market, you probably want much less exposure. I think the key in volatile markets in general is for investors to just assess their risk tolerance and then see if it's matched in the risks that they're putting on in their portfolios.
GHARIB: All right. Good advice. Liz Ann, pleasure to have you on the program as always.
SONDER:S Thanks, Susie, my pleasure.
GHARIB: My guest tonight, Liz Ann Sonders, chief investment strategist at Charles Schwab & Company.
