Liz Ann Sonders, Schwab's Chief Investment Strategist, formally launched Morningstar's 2016 Exchange Traded Fund Conference today.
She is neutral on all markets ... US, Foreign, and yes even EM. "Neutral" means hold current allocations based on risk tolerance and re-balance on volatility, like last February with the Brexit over-reaction. Re-balancing creates a built-in value premium.
The biggest threat to market stability is global debt. While private sector has deleveraged after 2008, the public debt has never been larger. But she believes 2008 was the "big quake" ... going forward has been and will likely continue to be a series of tremors until the monetary policy experiment plays out.
Most politicians don't understand difference between deficit and debt. US deficit (yearly debt interest payment to GDP) is quite low. But overall debt is very high. That doesn't even recognize entitlements. Inevitable for our entitlements to be addressed ... "politicians just don't want to discuss it."
Chance of recession in foreseeable future is low, based on Schwab's multi-factor analysis. For example, leading economic indicators remain below 2007 levels, so still room to run. Recessions are normally the result of excesses. US equity valuation is somewhat elevated (based on forward P/E), but this bull market has never been embraced. So, echo John Templeton ...
“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria,” he said. “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
She thinks we are stuck in a "skeptical" environment, perhaps leaning toward optimism.
Part of the skepticism is due to the two 50% drawdowns (an equity and debt bubble) since 2000. Most of the private investor money remains dubious on the market. Like sentiment during Great Recession. Not a single net dollar has flowed into US equity combined mutual fund/EtF market since 2007.
Presidential race remains too early to affect markets. Being an "8-year" election where an incumbent can't run, likely more uncertainty. She believes the higher a polling margin of victory, the more stable the markets. (She personally thinks the choice of two of the most disliked candidates is disappointing.) More important than the president on economy, is the impact of election on a gridlocked congress. Simply too early to tell.
Fundamentally, she believes, for better or worse (take note absolute investors), current markets are driven by
relative performance metrics, say expected earnings as opposed to say absolute (good or bad) earnings.
And, similarly, for better or worse, more than active versus passive or quantitative versus fundamental, current markets are driven by macro economic assessments versus business fundamentals of individual companies.
Can you believe that?
So much for guidance of Peter Lynch and Warren Buffett and Eric Cinnamond. For time being anyway.
On an interest rate rise in September, it's still on table ... she believes that there are more savers than debtors in country so if savers are not making any money, they can't fuel the consumption economy. Ditto for negative interest rates globally ... having opposite effect of intended. Time to get back to normalization to help economy.
Break, break.
Earlier in day were some pre-conference sessions led by Morningstar's Ben Johnson, head of Passive Strategies.
Let me just sat that given the AUM movement from "active" to "passive" funds, the quants seem to be winning. It occurred to me that the earliest index funds were our first forms of quant products.
Quants believe that most, if not all, of a money manager's alpha can be decomposed into a series of factor tilts, like value, small, or momentum. As AUM continues to move out of traditional active into more passive alternatives, I suspect the battle will be between tilt premia instead of between market cap index and bottom-up investors.
c
