The Federal Reserve is likely to raise interest rates sometime this year, but the likelihood of it occurring in September is lessened, Liz Ann Sonders, chief investment strategist at Charles Schwab, said Wednesday at the Morningstar ETF conference in Chicago.
After the lower-than-expected September jobs report and two weaker Institute for Supply Management reports on the service and manufacturing sectors, a September rate hike is “not at the center of the table, it’s at the corner. We expect the Fed to raise rates between now and year-end,” Sonders said.
Additionally, she added, although the U.S. economy is sluggish and some economic indicators are slowing, the U.S. is not at risk for a recession.
Sonders said the Conference Board’s Leading Economic Index continues to increase, after rising 0.4 percent in July and 0.3 percent in June. She explained leading indicators peak in advance of recession and then start to deteriorate. So far in the current economic cycle, the LEI hasn’t yet reached its previous high. Generally when they hit the previous high, it is usually four to eight years until the next recession.
“In an era of recession fears, expansions don’t die because of old age. They happen because of excesses…. One benefit of a sluggish economy is we haven’t had a buildup of excesses,” Sonders said.
It would be unprecedented for the U.S. to go into a recession without the LEI reaching its previous high before moving lower. Of all the factors that go into creating the index, the only trend that has worsened is consumer expectations. “That’s not the warning you get with LEI when the economy is running into trouble,” she added.
Sonders said she isn’t concerned that the corporate earnings recession will be a harbinger of a U.S. recession, either. She said when the U.S. economy goes into a recession, corporate profits also fall, but an earnings recession doesn’t always mean an economic recession.
The crash in crude oil prices and the spike in the U.S. dollar caused the earnings retreat. “That took down earnings, but not the economy,” Sonders said, adding she believes earnings are on the rebound after bottoming out in this year’s first quarter.
She’s also not worried that a rise in interest rates will cause a recession or harm the stock market. Getting the Fed to normalize monetary policy with a slow-cycle interest rate rise is good. During a slow-tightening cycle, the return on S&P 500 one year later saw a mean rise of 10.8 percent and a median rise of 17.4 percent.
Schwab’s current view on the stock market—whether for the U.S., developed international markets or the emerging markets—is neutral, and its stance is that investors should have their normal long-term strategies in place.