If the U.S. economy isn’t in an official recession, there are certainly enough indicators to signal that at least it’s in a “rolling recession,” Charles Schwab’s chief investment strategist Liz Ann Sonders told advisors at the firm’s annual Impact conference in Denver yesterday.

Sonders produced a chart of multiple key economic indicators—CEO confidence, the housing market, ISM manufacturing orders, the S&P 500 and consumer sentiment—all displaying serious declines in 2022. She told advisors that the best-case scenario probably is “a continuation” of what is shaping up to be a rolling recession, adding that it would appear some sort of recession is inevitable.

Nonetheless, the post-pandemic global economy is proving perplexing for market strategists, economists and central bankers alike. Most news out of Europe has been far worse than America’s economic reports, yet Sonders’ colleague, Schwab chief global investment strategist Jeffrey Kleintop, pointed out that third-quarter GDP in the eurozone was positive, to the surprise of many. 

All these mixed signals have befuddled the Federal Reserve’s communications strategy during the past year. The central bank has seesawed between “too much” and “not enough” commentary as Sonders said Fed Chairman Jay Powell keeps falling in love with words like “transitory” and “pivot” only to discard them a few months later.

Sonders noted his latest favorite phrase was “step down.” She didn’t say it, but the phrase is apparently an illusion to a deceleration in interest rate increases.

Both Sonders and Kleintop questioned whether using the term “step down,” which helped propel an equity market rally in October, was aligned with the Fed’s ultimate objective of subduing inflation. Kleintop cited the slowdown of interest rate hikes from the Australian central bank from 50 to 25 basis points as the kind of move optimistic U.S. investors were looking for. A “step down is not necessarily a good thing,” he said.

What would it take to prompt the Fed to reverse course? It would take more than a couple of months of modest slowdowns in the Consumer Price Index, Sonders said. In fact, that is already happening.

The Fed, in her view, is “trying to thread the needle,” by cutting the number of new job openings without “driving the unemployment rate way up.” But it wants to avoid the “fits and starts” monetary policy of the 1970s that let inflation get out of control.

Sonders said it’s likely that third-quarter earnings for U.S. companies will be down if one removes the energy sector’s profits from the mix. In the second quarter, U.S. corporate profits were up 8% but down 2% when energy was taken out of the picture.

Kleintop noted that the U.S. dollar is up 17% this year, and that’s produced some striking results, including a “40% rise in U.K. earnings relative to its U.S. counterparts.” That’s because U.K. companies derive a greater share of their revenues in dollars than in British pounds.

Part of the reason is the dominant position of British energy companies like BP and Shell within the U.K. economy. “The U.K. stock market is basically an energy ETF,” Kleintop said.

Another phenomenon is that stocks paying high dividends outperformed on the upside during October’s rally. “Usually they outperform on the downside,” Kleintop said.