September 30, 2011
Schwab Market Perspective: Perception vs. Reality
by Liz Ann Sonders, Chief Investment Strategist, Charles Schwab & Co, Inc. and Brad Sorensen, CFA, Director of Market and Sector Analysis; Michelle Gibley, CFA, Senior Market Analyst, Schwab Center for Financial Research®
There is not much more clarity in the US economy as economic data remains soft-to-mixed and bickering in Washington continues, keeping confidence among consumers and small businesses near 2008 lows. But there’s reason for optimism, especially for investors that keep a longer-term horizon in mind. American innovation, creativity, and entrepreneurship continue to be among our country’s best assets. Businesses are extremely profitable, balance sheets are strong, and cash levels are massive.
Business investment has been a bright spot in the economy and given that it’s only running at a pace slightly above depreciation, there’s likely significant pent-up demand building for when confidence returns. And consumers’ balance sheets appear to be well-improved relative to the crisis levels of 2008. We continue to recommend investors use pullbacks to add to equity positions as needed to keep allocations line with targets; while looking to pare back any fixed income positions that may have become outsized.
Global markets appear to be pricing in some dire scenarios. What does that mean for investors and how can they potentially benefit?
* Economic data continues to reveal sluggish activity, and markets have been increasingly trading in a “risk-on, risk-off” mode. While frustrating at times, opportunities can be found for investors who are patient.
* The Federal Reserve continues to try to stimulate greater economic growth, most recently with the announcement of “operation twist.” We have serious doubts this will engender any broad upturn, but it could help mortgage refinancings. We continue to look toward Washington to move beyond short-term rhetoric and provide some serious long-term plans that allow businesses to have more confidence in the future.
* European policymakers continue to delay any real action, increasing the risks of an escalation of the debt crisis. Meanwhile, China’s slowdown will keep downward pressure on global growth.