Page 21 - Investment Advisor June 2023

PORTFOlIO PeRSPeCTIveS

By Dinah Wisenberg Brin

Why sonders shuns stock Market Forecasts

In this environment, investors should focus on high-quality company
fundamentals, she says.

harles Schwab Chief Investment don’t want high-debt companies, you
Strategist Liz Ann Sonders sees want self-funding companies” with
Clittle value in Wall Street’s year- strong free cash flow that don’t have to
end S&P 500 forecasts for individual go to banks or credit markets for capital.
investors and for those advocating long- Sonders, who follows lots of eco-
term investing principles. “We don’t do nomic data points that influence stock
that. I think it is truly … just the dumbest prices, is paying close attention to infla-
exercise that Wall Street strategists do … tion and jobs data, Fed commentary and
a price target without any context,” she signs of stress in the banking system.
said recently about the S&P index pre- The economy has been experiencing
dictions that many firms make. “an incredibly unique cycle” primar-
“Even if I had a crystal ball and knew ily because of the COVID-19 pandemic
where the market was going to close the and everything that has come from it,
year, what would matter way more than those with positive earnings revisions with strengths and weaknesses rolling
that is what happens between any point and surprises. For dividend investors, through different segments at different
in time and then,” Sonders explained. “Is this “quality wrapper” also includes times, she noted.
it just steady as she goes and no move- stocks paying not only high dividends, Housing and much of the goods por-
ment? Never gonna happen. Do you have but offering dividend stability and the tion of the economy have gone “unequiv-
another big whoosh down, and you take ability to keep dividends growing. ocally into recession territory,” while
out the October lows (from last year), but Schwab thinks the current environ- disinflation, if not outright deflation, has
then you have a sharp rally from there? ment won’t reward high-speculation, low- kicked into the factory sector, she said.
To me the year-end price target is just quality stocks and market segments, she “But we have the offsetting strength
not of value or shouldn’t be of value.” noted. A very important shift within the in services,” she said, adding that service
Schwab’s $7 trillion in client assets are last year, with the Fed aggressively raising inflation is stickier by nature. “So here
owned by individual investors, Sonders rates from zero and shrinking its balance we are where we’ve had recession-level
noted. Year-end market forecasts may be sheet, has changed the outlook for compa- weakness, it’s just not been across the
useful in the institutional investor world nies and stocks, Sonders suggested. board in the economy.”
for measuring which strategists were right “We were in this high-liquidity, low- Sonders says to watch out for weak-
or wrong, “but for individual investors cost-of-debt world for years and years,” ness in the services market and to keep
and us espousing things like long-term she noted, adding that when liquidity is an eye on the labor market, which has
discipline and asset allocation and rebal- ample and money is essentially free, spec- stayed healthy partly because the ser-
ancing and diversification, the year-end ulation runs rampant and “companies vice sector is a large employer.
price target just doesn’t fit into that at all.” that otherwise might not make it kind of “We are starting to see some cracks in
So how should financial advisors guide hang in there — zombie companies.” Now, the labor market,” and tightening cred-
clients through the current uncertain and company fundamentals are reconnecting it conditions suggest there’ll be more
sometimes confusing economic and mar- to stock prices, so when it comes to equi- weakness in services, she continued. The
ket conditions? Beyond the time-tested ties, “stay up in quality,” she said. question is whether the economy will
advice to have a long-term, disciplined “We’ve also been saying monolithic start to see stabilization in the areas that
plan that’s tied to time horizon and risk decision-making doesn’t make sense got hit earlier — there already appear to
tolerance, Sonders suggests investors in this environment, meaning you just be signs that housing is stabilizing, she
focus on high-quality investments rather make a sector call … You’ve got to be said — “such that we continue to roll
than sectors, emphasizing companies quality focused,” she added. “In an through this without essentially the bot-
with low debt and high cash levels, and aggressive Fed hiking campaign, you tom falling out all at once.”

June 2023 Investment AdvIsor 19