While many continue to worry that the European debt crisis will topple the U.S. stock market, Liz Ann Sonders — whose calls on the start and end of the Great Recession were remarkably accurate — is a good deal more upbeat.
“There continues to be a cacophony of naysayers, but we have remained optimistic that the United States will again be able to defy predictions of incessant stagnation,” says Sonders, Charles Schwab’s chief investment strategist, in commentary written on the firm’s site with Brad Sorensen and Michelle Gibley. “There remain monumental challenges to tackle, but economic momentum has accelerated. We believe this could be setting the stage for a sustainable move higher by stocks thanks to relatively attractive valuations, continued solid earnings and improving economic data, and the ‘Wall of Worry’ pervading sentiment. In the past, these ingredients have boosted equities.”
Sonders says she thinks that unemployment will “continue to surprise on the upside”, and that “housing appears to be at least stabilizing, if not beginning to marginally improve, as inventories have been pared back and interest rates remain at record lows.”
One issue that has Sonders concerned: Congressional leaders’ failure to tackle major issues like the U.S.’s debt. She says that the failure of Congress to have even come to an agreement on the payroll tax cut — which expires next month — “continues to illustrate the ridiculousness of Washington right now. How can businesses plan when they don’t know what regulations, tax policy, incentives, etc. will be in place in the coming months?” She also thinks Europe is embarking on a recession that could be shallow but last several quarters.
Sonders lists emerging markets and Canada among the regions Schwab is high on. She also expresses optimism about the long-term prospects of stocks in general. “We understand the frustration but remain convinced that the best investment for outpacing inflation over the longer term is equities,” she says. “After a two-decade span when bonds outperformed stocks historically (as has been the case since the early 1990s), the following decade has always shown a reversal, with stocks outperforming. And … the earnings yield on equities is quite attractive compared to the yield on a 10-year Treasury, based on historical levels.”