CLA continues to work with leaders in the financial industry to bring you the latest information on all the ways COVID-19 is making an impact on your life. Today our chief wealth advisory officer, Clayton Bland, talks with the chief investment strategist at Charles Schwab, Liz Ann Sonders, about investment realities in these fast-moving times.
- Clayton Bland, Chief Wealth Advisory Officer, CliftonLarsonAllen Wealth Advisors, LLC
- Liz Ann Sonders, Chief Investment Strategist, Charles Schwab
What we talked about:
Bland: Hello everybody, I'm Clayton Bland, the chief wealth advisory officer with CLA Wealth Advisors. I'm welcoming Liz Ann Sonders from Charles Schwab with us. She is the chief investment strategist and we are very excited to have her here today. Thanks for joining us. We wanted to spend just a few minutes, we've got some questions and would love to get your feedback as it pertains to the market and what's happening in the economy. Do you mind sharing with us a little bit about what you're using what you're looking at from a leading economic indicator standpoint as a lot of that data is shifting rapidly. What are you now looking at for your outlook and your forecasting?
Sonders: Thanks so much for having me. So, if you think about the most common index that tracks leading indicators, it's put out by the conference board, it's the LEI – the leading economic index. It's got 10 sub components, but the problem is they lag to some degree, the rapidity with which we're getting data. These days, obviously we have started to see it in initial unemployment claims, which we got the first big jump, about a week ago from when we're recording this of over 3 million, and the expectation is that we could be up to 9 or 10 million pretty quickly. So, you have seen it there in the stock market, the S&P 500, is also a leading indicator. Clearly you've seen the impact there. We saw it a bit in the recent release of PMI data, with new orders dropping down to about 2008 levels. But most of the other indicators haven't yet picked up the severity of this recent decline in the economy.
Interestingly, though, there's a new index that was just created by the New York Fed probably to tie in some of the problems with getting accurate data. It's the weekly economic index put out by the New York Fed. The viewers here can Google it, but it looks at some shorter term real-time data, including staffing data. It also looks at claims, looking at same store retail sales on a much shorter term basis, looking at daily measures of consumer confidence. I have a feeling that's going to get some traction..
Bland: So you mentioned some of stimulus. Now that the president has signed the $2 trillion coronavirus relief bill and Congress passed it, what do you expect to start seeing some of the effects of that fiscal stimulus in the data and in the market?
Sonders: Well I'm glad, actually, government officials opted to use the term “relief” as opposed to, say “stimulus,” because I've been likening this to when we've had natural disasters in the past. You know hurricanes, earthquakes, the first thing that the government steps in to do through the fiscal side, whether it's through organizations like FEMA, is really the rescue package and I think that's akin to what we have seen now and is a relief package, it's a rescue package. It's sort of triage for the immediacy of the pain, whether it's to individuals or small businesses or even to larger businesses within industries that are most affected by this.
The reality, though, is looking down the road, especially if the containment efforts continue, meaning we keep the economy shut down for a longer period of time than what I think the expectation or hope is at this point. It's likely we'll need some other passage of an act, and it's only down the road that we would likely be able to define it as true stimulus. I think the other factor is the impact is going to be felt at varying speeds, whether it's how long it takes to get checks in the hands of individuals, the fact that in this type of environment, especially if they have lost jobs, it's likely to be saved and kept as opposed to put back into the economy. So, I think we're going to see a variety of impact in terms of timing and how quickly it provides some sense of relief.
Bland: And to some extent getting that money back into the economy, that's predicated upon these actual businesses being open and receiving commerce right back.
Sonders: We can supply people, businesses and individuals with additional money on a short-term basis, but the ability to spend it by virtue of everything being shut down, of course, is limited, too. This is both a supply and demand shock unlike anything we have ever seen.
Bland: That's a great clarification on relief versus stimulus, so if we then clarify and say, let's look at the stimulus that's been put into place from monetary policy with the Fed. In just kind of a quick recap we look at Fed Funds rate going down between zero to 25 basis points, you've got reverse repos they've been put in place, you've got QE, I don't know if it's four or five now, money markets being backed, asset purchases that have been extended — not only to just Treasuries and mortgage-backed securities, but CMBS — and they're even talking auto loans and student loans. What else is there, because that's something you know you hear people say — the Fed’s run out of ammo. What are some of the other ways, I guess maybe before you get to the other additional ways to think, when do you see the effects of that stimulus from the Fed potentially having an impact on the data and the economy?
Sonders: So, I think some of this stimulus, or some of the alphabet soup of programs that in some cases borrows from the 2008 financial crisis playbook — either in some cases that expanded on it, you know QE is now QE infinity — where I disagree with what I think is the consensus that the Fed is running out of ammunition, the reality is based on the structure of the Fed and what it can do, especially with many of these new programs. It's almost impossible for them to truly run out of ammunition. If you think just in terms of the simplicity of what they can do to the Feds Funds rate, assuming they won't take it into negative territory — which I don't think they will — it's unlimited what they can do, especially as they are sort of a partner on the fiscal side with the Treasury Department to, in some cases, offer loans in areas where they weren't even prevalent back in 2008.
So, I think there is more that can be done. You've seen a little bit of stabilization in some parts of the credit market. You've seen stabilization to some degree in the repo market, so the impact of some of what they've done is already being felt. I think longer-term though, the timing associated with further benefit is what we already touched on the fiscal side when we actually start to see the economy opening back up such that the loans provided in for instance to small businesses can actually start to work because they brought employees back on the payroll, they're opening their business back up and the timing of that is just so uncertain at this point.
Bland: One of the things I wanted to mention on this interview with you is you've done a phenomenal job. If anybody doesn't follow you on Twitter, they should because the amount of data and the charts that you put out is just fantastic. We all know it's changing very rapidly, but that's a great resource for anybody watching this. Liz Ann is fantastic. Can you share with what you're telling clients at Schwab in general, kind of broad terms, from an investment standpoint, but then also that encouragement that I know we all want to try and convey to people — which is like you can get through it and there's going to be light at the end of the tunnel. How are you sharing that message?
Sonders: I also want to highlight something that's very important to think about when we get into these crisis moments, and we have a report that I initially wrote back in 2008 and the title then and now is still “Panic is Not a Strategy.” We've updated a number of times just in this cycle not just now versus 2008 but we did it when we had the Eurozone crisis and other sort of riot moments within the market, even in what had been an ongoing bull market. So, some of it goes down to that — that the basics of panicking, especially if you're making all-or-nothing decisions, almost never works out very well. But more important is what we try to sort of pound the table on in a more normal market environment, which are the disciplines around strategic asset allocation, diversification across and within asset classes, and then probably most important is utilizing rebalancing on a somewhat regular basis.
The ongoing discipline means that we are adhering to the advice we always give — which is that investing should always be a process over time. Too often when we get into an environment like this we think of it as a decision at a moment in time. It should never be a decision at a moment in time, so if you had that discipline, you would have been diversified away from just say the U.S. equity market and the S&P 500. You probably would have been trimming into that high momentum into the February highs and possibly now even adding, so it's those tried and true disciplines that, quite frankly, are the closest thing you get to a free lunch in any kind of market environment. Sometimes we get reminded of that more forcefully in tough times.
Bland: Thank you very much Liz Ann. We really appreciate the time. It's great to speak with you. Happy to be here, thank you.
Sonders: Happy to be here. Thank you.