How to Trade Stocks Before a Recession: Strategist Charles Schwab

  • Charles Schwab’s chief investment strategist tells investors to stay neutral on stocks.
  • Liz Ann Sonders says customers should rebalance often and look for quality and value.
  • She argues that this market is unusually complex and betting on specific trends does not make sense.

Investors don’t like to think about the possibility of a


but Charles Schwab’s Liz Ann Sonders says it’s more likely than many realize.

Sonders is Schwab’s chief investment strategist and helps oversee the $7.87 trillion in client assets the firm manages. She says that the rise in interest rates and the tightening of balance sheets by the

Federal Reserve

combined with relatively weak economic growth, all make a recession more likely than a soft landing where the economy continues to grow.

“If all of these exogenous forces are moving the needle in one direction or another, I think it’s easier to argue that it’s moving the needle more towards recession,” she told Insider on Tuesday. . “The last 13 tightening cycles, 10 ended in a recession, three ended in a soft landing. So the odds are always more favorable for a recession than a soft landing.”

After months of signaling, the Fed began raising interest rates in March and is expected to continue raising rates steadily through 2023. Sonders says these up cycles typically start with an economy much stronger than the current one, which has been losing momentum for months.

This culminated with the startling news on Thursday that the US economy contracted in the first quarter of this year. Experts expected modest growth.

Higher interest rates are likely to further slow the economy by making it more expensive to borrow money.

From the beginning of this economic cycle to its monetary policy, everything was unique even before the war in Ukraine made things even more complicated. And Sonders says investors should fight their impulse to try to spin every development to their advantage — with an anti-inflation trade, a trade up in rates, a bet on growth or against it.

“One of the things we did a few months ago was effectively neutralize our tactical recommendations,” Sonders said. Since February, she hasn’t told investors to overweight tech stocks or underweight energy companies, or favor small caps over large or fixed income over real estate, for example.

Instead, Sonders suggests approaching this environment by favoring quality companies and emphasizing low-priced value stocks.

That means focusing on “positive earnings revisions, positive free cash flow performance, a strong balance sheet and not paying obscene valuation,” she said. “It’s sort of a back-to-basics approach of really investing based on characteristics, instead of making a sector call or two or a broader asset class or two.”

But she doesn’t just tell clients to go neutral and let stocks go from there. Sonders says investors should be careful not to take what the market gives them and rebalance their portfolios more often than usual. It does not recommend a specific timing scheme or frequency.

“Ask your portfolio to tell you when it’s time to rebalance, so you reduce your strength more frequently, adding where there’s weakness,” she said. “It’s more of a broad message about letting


work in your favour.”

She also warns investors that they might be too focused on inflation right now. While this is unquestionably a significant issue for the economy and the markets, she says investors who steer their portfolios around inflation could miss the chance of it peaking and the momentum changing. drastically, ruining those transactions.

“I think there’s more than just emerging evidence that, sooner than I think a lot of people think, we might start hearing the term ‘supply glut,'” she said. . “We’re starting to pile on the consumer companies that are now talking about maybe having stocked too much now in declining demand.”

Still, Sonders says the disinflation of the past two decades is likely gone, and from here inflation should stay at a higher level, even if that level is not in the reported 8% range. during the last years. month.

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