Liz Ann Sonders: 'We Could See Some Inflation Scares'

Episode Summary

Executive Summary: In this podcast, Lizanne Saunders of Charles Schwab discusses macro analysis for individual investors, emphasizing the importance of leading vs. lagging indicators and the rate of change. She covers the Fed's powerful role, the K-shaped recovery, fiscal priorities, inflation outlook, and equity market rotation. She expects international stocks to outperform US stocks in the next cycle.

Main Topics: Understanding Economic Indicators (Priority: 5/5): Lizanne explains the difference between leading, coincident, and lagging indicators, and how the stock market focuses on rate of change rather than absolute levels. She highlights new high-frequency indicators like mobility data. Monetary Policy and Market Cycles (Priority: 5/5): Discussion on the Fed's aggressive policies, including zero interest rates and QE, and how they have supported asset prices. Lizanne warns against complacency that the Fed will always backstop the stock market. COVID-19 Economic Impact and K-Shaped Recovery (Priority: 4/5): The pandemic has created a stark divide between winners and losers, with services and travel sectors severely damaged. Long-term changes in behavior (e.g., remote work, digital adoption) may persist. Fiscal Policy Priorities (Priority: 4/5): Lizanne stresses the need for targeted fiscal relief, especially for small businesses and unemployed individuals. She supports state and local aid and liability protection, urging a reasonably sized package. Inflation Outlook (Priority: 4/5): Despite massive money supply growth, inflation remains subdued due to low velocity. Lizanne expects inflation scares in 2021 but not systemic inflation until full employment is reached. Equity Market Rotation and Concentration (Priority: 4/5): The market has seen a rotation from COVID winners (top 5 stocks) to the rest of the market. This broadening is seen as a benign way to reduce concentration risk, unlike the 2000 tech bust. International vs. US Stocks (Priority: 3/5): Lizanne expects international stocks to outperform US stocks in the next cycle due to valuation differentials, improved earnings, and a weaker US dollar. Diversification outside the US may pay off.

Key Arguments: The stock market cares more about the rate of change (better or worse) than absolute levels (good or bad). The Fed's actions in March 2020 prevented a financial system crisis, but investors should not assume the Fed will always backstop equity markets. The pandemic has exposed a K-shaped recovery, with a wide chasm between winners (tech, goods) and losers (services, travel). Fiscal relief must be targeted and passed quickly; state and local aid and liability protection are important. Inflation is not an acute worry because money velocity is low; systemic inflation requires full employment. The market rotation from the top 5 stocks to the broader market is a healthy broadening, reducing concentration risk. International stocks are poised to outperform US stocks due to valuation, earnings, and dollar weakness.

Data Points: M2 money supply growth: 25% annualized - Driven by Fed and fiscal stimulus, but velocity remains low. Top 5 stocks weight in S&P 500: 25% - Peaked on September 2, 2020, representing Apple, Microsoft, Amazon, Google, Facebook. Year-to-date performance of top 5 stocks vs. others (as of Sept 2, 2020): Top 5 up 65%, other 495 up 3% - Illustrates extreme concentration and market narrowness. Percentage of S&P 500 stocks in bear market (as of Sept 2, 2020): 36% - Despite the index near highs, many stocks were down 20% from 52-week highs. GDP clawback from pandemic: Two-thirds - GDP has recovered about two-thirds of the pre-pandemic level. Payrolls clawback: Two-thirds - Similar to GDP, payrolls have recovered about two-thirds of lost jobs.

Pivotal Quotes: "The stock market has a remarkable ability to look across chasms of economic contraction to the other side." — Lizanne Saunders: Discussing the forward-looking nature of the stock market and its ability to anticipate recovery. "Don't fight the Fed." — Lizanne Saunders (quoting Marty Zweig): Emphasizing the importance of monetary policy in driving market cycles. "We've had plenty of inflation, it's just been in asset prices, not in the real economy." — Lizanne Saunders: Explaining why massive stimulus hasn't led to consumer price inflation.

Implications: Investors should focus on rate of change in economic data, not just levels. Diversify internationally and across sectors, as the market is rotating from growth to value and from US to non-US. Be cautious of Fed complacency and prepare for potential inflation scares.