Why 2023’s “Rolling Recession” is Almost Impossible to Predict

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, and today we have an incredible guest, Liz Ann Sonders, who is the chief investment strategist for Charles Schwab. That means that she and her team oversee the assets, almost $8 trillion in client assets that are invested into the stock market. So if you want to learn from someone who is truly in tune with everything that’s going on with the economy, this is going to be an incredible episode for you. I’ll just let you know that we don’t talk that much about the specifics of real estate or the housing market, but I assure you, if you invest in literally anything, you are going to want to hear what Liz Ann has to say.
She has some of the most sophisticated, but honestly really digestible and easy-to-understand opinions about what is going on, not just in the stock market, but in the bond market and how that correlates to the broader economy, and by way of the broader economy, also correlates to real estate. So I’m going to just stop talking because this show is going to be so great. I’m so excited to share it with all of you. We’re going to take a quick break, but then we’ll be right back with Liz Ann Sonders, who’s the chief investment strategist for Charles Schwab.
Liz Ann Sonders, thank you so much for joining us here On The Market.

Liz:
Hi, Dave. Thanks for having me. Looking forward to our conversation.

Dave:
Oh, it’s our pleasure. For audience who doesn’t know you already, can you just introduce yourself and what you do for Charles Schwab?

Liz:
Sure. So Liz Ann Sonders, I’m the chief investment strategist at Schwab. I’ve been in this role and at Schwab for 23 years. I was, 14 years prior to that, at another firm, so I’ve been in the business for 37 years. My role at Schwab, I guess, would be best termed as an interpreter of what’s going on in the combination of the economy and financial markets, in particular the US equity market, and trying to connect the dots between the economy and the market and share perspectives and advice and learnings and tips with our $8-plus trillion worth of client accounts.

Dave:
Wow. Oh my God.

Liz:
Almost all of which are essentially individual investors, so we’re big.

Dave:
That’s a lot of assets under management. Very hefty client portfolio you manage there. So the people who listen to this audience, I don’t want to generalize everyone, some of them are certainly experts in equities, but most of us are primarily real estate investors. So could you just start by giving us an update on what the state of the stock market is at this point in 2023?

Liz:
Sure, so this has been an incredibly unique cycle both for the stock market and the economy over the past three and a half years for obvious pandemic-related reasons. You had the pandemic, very brief pandemic recession and in turn bear market stocks, and then courtesy of massive stimulus, both monetary stimulus and fiscal stimulus, you launched out of that very brief recession as well as the very brief bear market and had a couple of very strong years. Last year was a much more difficult year obviously for the equity market with the market topping out at the very, very beginning of the year and the chief culprit behind the bear market was what has been the most aggressive rate hiking cycle in at least the past 40 years in terms of Fed policy. And that was the key reason why the market went into bear territory.
You had a relatively recent bottom in October. The market has had an extraordinarily strong move up off that October low. Burning questions around, “Is it just a rally within an ongoing bear market or did that represent the start of a new bull market?” To some degree, I’m not sure the semantics matter all that much. I think that the recent consolidation in the market has been driven by actually stronger than expected economic data, which meant yields have moved well back up again and concerns that maybe the Fed isn’t quite finished. And I grew up in this business working for the late great Marty Zweig who actually coined the phrase, “Don’t fight the Fed.”
So that was certainly the market was not fighting the Fed last year, is fighting the fed a little bit now. So I don’t think we’re out of the woods yet. There’s a lot of uncertainty, but this is the nature of the equity market. There’s bull markets and there’s bear markets.

Dave:
So what do you think has driven the run-up in the stock market this year, whether it’s part of a bear market or bull market, as you said, that’s semantics, but what is driving the inflow of capital or the investor sentiment that’s led to this run-up in prices?

Liz:
So I think there were several contributors when … If you go back to last October when we started this move up off those recent lows, some of it was actually the retreat in bond yields that we were starting to see where you had had, about a week after the equity market bottomed, you saw the 10-year treasury yield peak up around where it is right now at, about 4.2%, and you subsequently saw that yield drop almost a full percentage point. And that became a pretty powerful tailwind behind equities. There was also a sort of a budding impression or hope that the Fed, because of how aggressive they had been, that they were getting close to the point that they could pause rate hikes. That ultimately got pushed further into this year than what was originally expected, but that was a basis for the move higher.
And then there’s another old adage around market performance, which is the market likes to climb a wall of worry. So oftentimes uncertainty, weak or perceived or otherwise economic conditions aren’t necessarily negative for the market because of that contrarian sentiment perspective that the stock market often displays. And then what particularly happened to narrow the market’s performance was the banking crisis that started in early March with the failure of Silicon Valley Bank. That was the point where the market became very heavily concentrated up the capitalization spectrum, a very small handful of names. The Super 7, the Magnificent 8, whatever fun label you want to apply to it, was driving 100% of the performance.
And I think that unique part of this move up was driven by the banking crisis. We want to go into highly liquid names that have strong balance sheets and cashflow was this era’s defensive type names, those techie kind of names. That in and of itself though represented a risk for the market and I think that’s some of what has been at play more recently in this consolidation period because of concerns about that concentration. The analogy that I think is often apt, not that we ever like to think about battlefields, but when it’s just a few soldiers at the frontlines or a few generals at the frontlines and the soldiers have all fallen behind, that’s not a very strong front. When you’ve got the soldiers coming up to the frontline, even if the generals start to step back, that’s a stronger battlefront. So that’s an analogy that I think helps put that concentration risk in context.

Dave:
So just to make sure I’m understanding, the run-up especially since the bank crisis has really been concentrated in some of these mega cap companies and-

Liz:
Until a month or so ago.

Dave:
And now in the last month or so, to continue your analogy, are the soldiers catching up or are the generals falling back to where the soldiers were?

Liz:
For a while there, it was a little bit of both. So you had convergence happening where you saw some profit taking amongst that small handful of names while, at the same time, you were starting to see broader participation down the cap spectrum into other areas of the market that hadn’t participated. More recently, what they call market breadth, their percentage of stocks that are doing well, that has rolled over and you’ve seen deterioration pretty much across the board and that’s why I call it a corrective phase or a consolidation phase. Prior to that, you were seeing this convergence where the generals had taken a few steps back, but more soldiers and that, for a while, looked like a healthy development.
Now we’ve seen a bit of broader deterioration in breadth. There’s probably still a bit more to go on the downside there before I think the market can find more stable footing.

Dave:
Do you think this recent consolidation or just generally the sentiment in the market tells us anything useful about the broader economy?

Liz:
So investor sentiment and more economic sentiment measures like CEO confidence or consumer sentiment, they don’t always tell the same story. There can sometimes be some overlap. In fact, some of the consumer confidence or consumer sentiment measures have the questions embedded in the surveys. They have one or two about the stock market. So sometimes a strong stock market can help boost more economic measures of sentiment and vice versa. But what was interesting in the last couple of months is, at the end of May, beginning of June when we saw the most extreme concentration, there was also a lot of frothiness that had come into investor sentiment indicators. Extreme high level of bullishness on some of the survey-based measures of sentiment like AAII, American Association of Individual Investors. You were seeing huge inflows into equity ETFs, especially tech-oriented ones. At the same time, there was still a lot of consternation expressed in some of these more economic sentiment measures by CEOs, by consumers.
Now investor sentiment, at extremes, tends to represent a contrarian indicator, not with anything resembling perfect timing, but my favorite thing ever said about the stock market goes right to the heart of sentiment as a driver and it was probably the most famous phrase ever uttered by the late greats Sir John Templeton and it’s, “Bull markets are born on pessimism, they grow on skepticism, they mature on optimism and they die on euphoria.” And I think there’s not a more perfect description of a full equity market cycle. Maybe what’s compelling about that phrase is that there’s no word in there that ties into what we think on a day-to-day basis drives the stock market, what we focus on, earnings and valuation and PE ratios and economic data and Fed policy.
It’s all emotions and there’s probably nothing better that defines major bottoms in the market and major tops in the market, not every little wiggle, than extremes of sentiment. Launch points for bull markets tend to come when sentiment is incredibly despairing and vice versa. So that’s what I spend probably more time focused on than the other more technical economic valuation-oriented metrics. I think that really defines market cycles probably better than any other set of indicators.

Dave:
That’s really fascinating. Obviously, you look at the stock market, you see all this complex technical analysis and I’m sure that still has use, but it’s really interesting to know and it makes sense that behavior and psychology is really driving the entire market.

Liz:
It’s not only the market. Behavior and psychology drives inflation. Behavior and psychology drives the economy. The whole notion of animal spirits is embedded in everything that we do and observe and how we live. And it’s not just a market phenomenon, it’s an economic phenomenon. Animal spirits and fear and greed, it comes in play in everything that we do.

Dave:
Absolutely. And a great stock trading podcast, Animal Spirits as well. I totally agree with what you’re saying, but the data analyst to me now wants to know how I can measure sentiment and psychology. Is there a good way to do that?

Liz:
Yeah, there’s myriad ways to do it. I would say the first thing is to understand that there are two broad buckets of sentiment indicators and now I’m talking investor sentiment, not economic sentiment. There’s attitudinal measures and behavioral measures. So attitudinal measures would be something like the AAII survey. It’s a weekly survey of their tens of thousands of members. They’ve been doing this since the late 1980s. And based on the questions, they come up with three categories of investors, bullish, bearish, neutral. And then they apply percentages to how many are bullish, how many are bearish, how many are neutral. So that’s purely an attitudinal-based survey. They’re getting on the phone and saying, “Are you optimistic? Are you not?”
Interestingly, AAII also does a monthly analysis of the actual exposure to equities, to fixed income, to cash of their same members. And what’s really interesting is there are times where what investors are saying and what they’re doing are diametrically opposed and that was the case a little more than a year ago in June of 2022 when the market was really first struggling into what was a pretty significant low at that point. You saw, I think, a record or a near record percent of bears in that survey, but they hadn’t lowered equity exposure. So they were saying, “I don’t like the market,” but they actually hadn’t acted on that view.

Dave:
That’s interesting.

Liz:
So you also have to look at behavioral measures of sentiment. AAII, that allocation survey represents that, something like the put-call ratio in the options market. That’s a behavioral measure of sentiment. Fund flows, the amount of money going into equity ETFs or equity mutual funds, that’s a behavioral measure. There are other attitudinal measures too. One of them is investor’s intelligence, which looks at the advisors that write newsletters and just writers that are just out there writing investment newsletters. That’s an attitudinal measure because it’s not tied to what the advisor’s doing. It’s how they’re expressing their views in the public domain. So I look at all of them. So it’s the amalgamation that’s important and understanding that you’ve got to see whether the behavioral side matches the attitudinal side. Sometimes they can be disconnected.

Dave:
That’s fascinating. Just using your example from June of last year, do you think the disconnect comes from a lack of other options like people didn’t know where else to put their money or what do you attribute the contrast there to?

Liz:
Well, in June of last year, we knew we were in a very aggressive tightening cycle. The Fed had started to raise rates in March. They were also shrinking the balance sheet. So that was seen as a big near term negative. June of last year was also the month that there was a nine-handle on the consumer price index. So inflation was at its peak at that point. You were starting to see deterioration in a lot of the economic data, particularly expectations tied to inflation. So it was just a confluence of things happening at that particular time and the market was weak. So people were reacting in surveys to weak action. They just hadn’t really done much yet at that point.
Fast forward to the October low, the attitudinal side matched the behavioral side. You were back in washout mode, despair in the attitudinal measures, but you would had capitulation behaviorally. What I often like to say is the, I’ll use a real technical term here, Dave, the puke phase, where everybody is just, “I’m out.”

Dave:
[inaudible], yeah.

Liz:
It wasn’t quite as extreme as times like March of 2009, but you finally had that better balance between pessimism behaviorally and pessimism attitudinally.

Dave:
Oh, that’s so interesting. Thank you for explaining that. I want to shift a little bit to some recent market events, which is, we are recording this on the 17th of August just so everyone knows, and just in the last few days, bond yields have started to run up pretty aggressively. Obviously, that is implications for the equities markets, and for real estate investors, we care a lot about this due to their correlation to mortgage rates. So I’m just curious if you can help us understand why yields have been rising so quickly.

Liz:
Well, some of the economic data has been better than expected. So as a tie in to what’s going on in the economy, you can point there, but you also have to remember, and it’s amazing to me how many investors still don’t grasp the relationship between bond yields and bond prices. They move inverse to one another. So when bond yields are going up, it means prices are going down. So sometimes the yield movement can be driven by what’s going on in the economy, but sometimes supply demand, fundamentals, the aggressiveness of the buyers or the sellers can move the price, which in turn moves the yield.
And I think on the price side of things, what has conspired to bring prices down is increased supply of treasuries in the aftermath of getting through the debt ceiling potential debacle, but we also had the recent Fitch downgrade of US debt. So I think the supply demand issues put downward pressure on prices, all else equal put separate pressure on yields and then you have that, for the most part, better than expected economic data and you’ve seen a breakout on the upside. There’s a lot of money in the equity market that trades off of technicals, speculative money that’s more short term in nature and it might be algo driven or quant based and triggered off certain technical levels.
Well, there’s also money that does that in the fixed income side of things. So sometimes they move down in price and move up in yield, can feed on itself and the speculators will play that momentum at some point. So you could see some momentum-driven trading that has potentially exacerbated the move beyond what the fundamentals might suggest.

Dave:
And do you have any idea or thoughts on whether yields will stay this high?

Liz:
So my colleague, Kathy Jones, is my counterpart on the fixed income side, so she’s our chief fixed income strategist. I say it without really meaning it as a joke, but 15 years ago or so when Schwab brought Kathy on was a joyous day in my life because that’s when I was able to stop pretending like I was an expert on the fixed income side of things. So very important caveat. I don’t spend my waking hours deep diving on the fixed income side, but I can certainly, she’s part of our larger group, compare it some of the thinking there. And for the past year plus, yields have been somewhat range bound, low 3s to low 4s and you’ve been bouncing up and down, but we seem to be breaking out on the upside.
There probably is going to be some pressure at some point where yields don’t go too far higher unless we really see surprising, not resilience in inflation, but a turnback higher in the inflation data or if the expectations around Fed policy start to really shift as a result of that. All that said, what I don’t think, let’s assume 4.3 is a near term high in yields and let’s assume the market is right in pricing in rate cuts starting next year. Now I disagree with the market’s perception of that, but we can talk about that separately. What I don’t think is going to happen is, when yields start to come down, when the Fed is done, when they eventually have to start cutting rates again, we are not going back to what we call the ZIRP world, the zero interest rate, which at the time that the US for many years was a 0% interest rate, a lot of the rest of the world was actually in negative territory.
I think that ship has sailed and the next easing cycle, barring some extreme shock to the financial or economic system globally, I think that experiment in zero interest rate policy and negative interest rate policy is one that for the most part was seen as having more in the fail column than in the success column. I think it bred capital misallocation, lack of price discovery, zombie companies. And so I don’t think we head back to 0% interest rates. I also think we’re also entering into a more volatile inflation secular environment. The great moderation, that term was coined by Larry Summers and it stuck and it defined the period from the late ’90s up until the pandemic where you basically had declining inflation the whole time. And that was because the world had abundant and cheap access to goods, to energy to labor. We were in the massive globalization surge, China coming into the world, economic order. All of those ships have sailed.
And I think we’re going back to what was the 30-year period or so prior to the great moderation. There’s no coined term for it, the one I’ve been using. Maybe it will take off like great moderation is the temperamental era, which wasn’t a, “Inflation is high and stays high in perpetuity,” there was just a lot more volatility inflation, and in turn, more volatility in terms of what the Fed had to do to combat the problem. And I don’t think this is the 1970s, but I think we’re in a more volatile inflation backdrop.

Dave:
So in addition to maybe the zero interest rate policy being somewhat of a failed or controversial, at best, experiment, you think the Fed needs to keep some ammunition, if you will, by even if there is a pullback in the labor market, keeping rates a little bit high so that they have some wiggle room if there is some volatility in inflation.

Liz:
So not only wiggle room to come lower, but I think the lesson that the current Fed and Powell specifically, I think, takes from looking at the experience of the 1970s was not so much the playbook of the drivers being similar, they’re quite different, is that the problem in the 1970s was declaring victory a couple of times prematurely, easing policy only to see inflation get let out of the bag again, scramble to tighten policy again, hang the Mission Accomplished banner, rates go down again, inflation’s let out of the bag again. And that’s ultimately what led to Paul Volcker having to come in and pull a Paul Volcker by just jamming up interest rates, almost purposely bringing on the back-to-back recessions of the early ’80s in the interest of really finally breaking the back of inflation.
And I think that’s really … That’s why I think there’s a disconnect between what we’re facing here in the current environment in terms of growth and inflation and the market’s expectation right now that the Fed could cut at least five times next year. And I think the market hasn’t quite come to grips with the message the Fed is trying to impart, which is, once we pause, once we get to the terminal rate the stopping point, the inclination is to stay there for a while, not to quickly turn and start easing policy again because they want to make sure that inflation has not only come down, but it is likely to stay contained.

Dave:
Yeah, and they have cover to do that, right? Because the labor market continues to show pretty good strength. GDP is not amazing, but it’s still up. So it feels like, unless-

Liz:
They not only have cover.

Dave:
There’s no impetus for them to do it.

Liz:
Right. That’s the better way to think of it. That’s where I think the disconnect is. It’s almost a, “Be careful what you wish for,” because an environment that suggests the Fed has to, as soon as the beginning of next year, go into fairly aggressive rate cutting mode, that’s not a great economic backdrop. And this idea that simply if inflation continues to come down that that represents a green light for the Fed to cut doesn’t make a lot of sense. It does support a pause, but the pivot to rate cuts, I think that the Fed’s bias, especially with a 3.4% unemployment rate, is once they get to the terminal rate is to stay there for a while.

Dave:
Yeah, that makes total sense to me. Unless there is a reason, an economic driver for them to cut rates, they’re not just going to do it just to supercharge the economy, at least it doesn’t seem like.

Liz:
Well, the only, I think, rational thought behind why the Fed could start cutting next year without there being a clear recession in sight, without significant deterioration in the labor market is, if disinflation persists at the point the Fed is no longer raising rates and they’re holding steady, the fact that inflation continues to come down means real rates are going up. And so some are thinking that they don’t want to establish the conditions for restrictive policy getting more restrictive even though they’re not doing anything, but with inflation continuing to come down, it means real rates are going up. So there is some rational thought there.

Dave:
That makes sense.

Liz:
It’s just a question of whether real rates going up and being restrictive, whether the Fed views that as starting to represent potential damage for the economy. All else equal, I think the Fed’s inclination is to sit tight for a while.

Dave:
And does that mean you’re not forecasting a break in the labor market or a recession anytime in the near future?

Liz:
So for more than a year now, we’ve been calling this a rolling recession, rolling sectoral recessions. And that is somewhat unique, certainly unique relative to the past two recessions, which were bottom falls out all at once across the economy, different drivers each time. Obviously, the pandemic caused a bottom falls out all at once because the world shut down our economies. So that was unique, but that was an all at once, everything all at once. To some degree, that was the same thing in ’07 to ’09, particularly the worst part of the financial crisis with the combination of the Bear Stearns failure and the Lehman failure and the housing bubble bursting.
And because of the trillions of dollars in the alphabet soup of derivatives attached to the mortgage market in a massively over leveraged global financial system, the housing market busted and it took down the entire global financial system with it. So that’s sort of everything-all-at-once-type recessions. This one, not that any of us want to relive the last three and a half years associated with the pandemic, but it’s important to go back to that point, the point where the stimulus was kicking in, courtesy of the Fed, courtesy of the fiscal side of Treasury and Congress. And that money, the demand associated with it, all that stimulus at that time, was forced to be funneled into narrow segments of the economy, particularly the goods side of the economy, housing, housing-related, consumer electronics, Peloton machines, Zoom equipment, etcetera because we had no access to services.
That was the launch for the economy to come out of the recession, but it was heavily goods-oriented. That was also the breeding ground of the inflation problem we’re still dealing with and it was exacerbated at the time by the supply disruptions. So that was the initial stage of this. But since then, those categories, manufacturing, housing, housing-related, a lot of consumer-oriented goods, electronics, etcetera, leisure, those have gone into recessions. It’s just been offset by the later strength and services. Same thing has happened within the inflation data. You had a massive surge in inflation initially on the good side, then you went into disinflation and in some categories were an outright deflation, but we’ve had the later pick-up on the services side. Services is a larger employer, which helps to explain the resilience in the labor market.
So we’ve seen the weakness roll through. It hasn’t yet hit to a significant degree, services or the labor market. To me, best-case scenario is not so much soft landing because that ship already sailed for the segments of the economy that have had their hard landing, is that, if and when services and the labor markets start to get hit, that you’ve got offsetting recovery in some of the areas that have already gone through their recessions. So I just think you have to look at this cycle in a more nuanced way. That said, if somebody said, “All right, feet to the fire, Liz Ann, you’ve got to say yes or no in terms of, will the NBER at some point say, ‘Okay, recession?’” I would say yes.

Dave:
Okay. Well, I liked your much more nuanced answer anyway. I think we’ve talked on the show a few times that the label recession has almost lost its meaning in a way because it doesn’t actually describe the conditions that we’re seeing and doesn’t actually give you any actionable insight that you could base your decisions off of.

Liz:
Well, it’s so lagging too. The NBER, the day they make the announcement, it’s a recession. And the NBER, the National Bureau of Economic Research, they’ve been the official arbiters of recession since 1978. It’s not two-quarters in a row of negative GDP. That’s never been the definition. I don’t know why people think that’s the definition, but it’s not. They look at a lot of different variables, but simultaneous on the day the NBER says, “Okay, it’s a recession,” they announced the start, which is by month, not by day. They go back to the peak in the aggregate of the data that they’re tracking, which is why, if you were to look at a whole roster of data points, looking back at what we know were the start points of each recessions, the data actually at that time looked pretty good.
What you did know at that time was the descent would be significant enough that it reached a low level sufficient enough to say, “Okay, it’s recession,” the dating it then goes back to the aggregate peak. The average lag in terms of the NBER saying, “Okay, it’s a recession,” and when they backdated as having started is seven months and sometimes it’s even longer. The NBER came out in December of ’08 and said, “Okay, we’re in a recession. By the way, it started a year ago.”

Dave:
“Right, yeah, thanks for letting us know.”

Liz:
And when the NBER announced recession associated with the pandemic, when they announced that, “There was a recession and here’s when it started,” it was actually already over at that point, but it was another 15 months before they said, “Okay, it’s over,” and it ended 15 months ago. So this idea of, “Well, why don’t I just wait as an investor? Why don’t I just wait until the coast is clear? We know we’ve had a recession. We know it’s over. It’s been declared as over. Stock market’s a leading indicator,” man, you have missed a lot of the move on the upside.

Dave:
Yeah, like you said, it is by definition a retroactive label. You can’t use it to make decisions, which is an excellent transition to the last topic I wanted to get into, which is, for our audience, people who are probably mostly investing in real estate, but I would hope are still considering investing into bonds and stocks as well, what strategy would you recommend in these confusing and uncertain times?

Liz:
There is no one cookie cutter answer that’s right for all investors and that’s really important because I think, particularly in the world of financial media, there is either a desire for the cookie cutter answer or there’s just not a willingness to provide the time for the real answer to questions around, “How do I invest? What should I do with my money?” The financial media, in particular, it’s all about, “Should I get in? Should I get out?” And I always say, “Neither get in nor get out is an investing strategy. That’s just gambling on two moments in time.” So the first thing is to actually have a plan and that plan has to be tied to your own personal circumstances. The obvious ones like time horizon, but also risk tolerance. And sometimes people make the mistake of equating the two, meaning, “I’ve got a long time horizon. Therefore, I’m risk-tolerant. I should take a lot of risk.”
What then comes into play is the other really important thing you need to do is try to assess before you make the mistake and learn the hard way, whether your financial risk tolerance, “What’s on paper? How much money do I need to live on? How much do I want to try to save? Do I need to live on the income associated with my investments or I just want the appreciation to grow the sum, the retirement nest egg?” That’s your financial risk tolerance. But if you get the first 15% drop in your portfolio because you go into a bear market and you panic and sell everything, your emotional risk tolerance is entirely different from your financial risk tolerance. So trying to gauge that.
Then those other facets of … What I always say when somebody will say to me, “What are you telling investors to do?” and I always answer that, even if I had a little birdie land on my shoulder and tell me with 97% certainty what the stock market was going to do over the next, whatever year or two, what the bond market’s going to do, what commodities are going to do and I had that information, very high conviction, but I was sitting across from two investors. Investor A, 75 years old, retired, built a nest egg, can’t afford to lose any of it and needs to live on the income generated from that. Investor B is 25 years old, they go skydiving on the weekends. They inherited $10 million that they don’t need. They’re not going to open their statements every month and freak out at the first. So one high conviction view, almost perfect knowledge of what the markets are going to do, what I would tell those two investors is entirely different.
So it all is a function of your personal situation, your risk tolerance, your need for income, the emotions that come into play and so you got to have a plan.

Dave:
I absolutely love that. I’m smiling, because in real estate, we talk about that a lot as well because people want to know, what, buy for cashflow, buy for appreciation, buy in different types of markets and there is no one-size-fits-all advice for any type of investment. If you’re approaching your retirement, “Are you 22 years old? Do you have a high income? Do you have a low income?” it’s completely different. And like you said, with media, people want a quick answer, but if you want to be a successful investor, you have to root your strategy in your own personal desires, and to your point, your own psychology and behavior.

Liz:
That’s right. And maybe it’s a little more boring to talk about things like diversification across and within asset classes and have a plan and be diversified and periodic rebalancing. Maybe it’s not as exciting as, “The market is really expensive here. I think a crash is coming and I think it might happen by next Tuesday and then you want to be an aggressive buyer.” That’s just gambling on moments in time and investing should be a disciplined process over time.

Dave:
Yeah, one gets a lot of YouTube views and the other one’s actually a good investing strategy. Sometimes those are at odds.

Liz:
Yeah, and don’t get investment advice from TikTok or YouTube. It can be a component of good information, but make sure it’s in the context of an actual plan and the education associated with that.

Dave:
Absolutely. It could inform your strategy, but you can’t take their strategy.

Liz:
Right.

Dave:
I think there’s a difference between those two approaches.

Liz:
100%.

Dave:
All right. Well, Liz Ann, thank you so much for being here. This was a fascinating conversation. We really appreciate your time.

Liz:
My pleasure.

Dave:
If anyone wants to follow your work, where should they do that?

Liz:
Well, interestingly, our research, everything that I write, videos that I do, my counterparts in international and fixed income, all of our research is actually on public site schwab.com. You don’t have to be a client, you don’t have to have a login. So all of our research is on schwab.com, but I’m also on, I guess, we don’t call it Twitter anymore, so I’m on X and I post everything that I write, all the videos that I do, TV appearances, promote podcasts and day-to-day, minute-to-minute charts and information and reaction to economic reports coming out. So that’s probably the most efficient way to get everything, but I’ve had a rash of imposters, so just make sure …

Dave:
Oh, that’s the worst.

Liz:
… you’re following the actual @LizAnnSonders.

Dave:
We will put a link to your profile in the show. I’ve been following you on Twitter. That’s how I first found out about you. Excellent. Well, X, I’ve been following you on X, whatever you say now. But yeah, great information just about the economy, super digestible as well, so highly recommend it.

Liz:
Thank you.

Dave:
Liz Ann, thanks again. We appreciate it.

Liz:
My pleasure. Thanks for having me.

Dave:
All right, another big thank you to Liz Anne Sonders for joining us. Honestly, that is truly one of my favorite interviews that I have ever done. I think Liz Ann does an incredible job just explaining what is going on in the economy and what’s going on in the stock market. And I know not everyone who listens to the show is super invested into the stock market, but I think there’s some really interesting and important takeaways here. One thing I was really fascinated about was just about how much investor sentiment really drives behavior and drives the economy.
And it’s not always all of these technical, financial, monetary policy things that I definitely am always obsessing over like Fed policy or what’s going on with certain indicators. And it just makes you realize that obviously the economy is just an amalgamation of human behavior and so you should just be paying attention to, as much as you can, sentiment. I think that is broadly applicable to the real estate market. Just think about something like, for example, the lock-in effect. That is something that is, sure, it’s financial, it is rational in some ways, but it is, in a lot of ways, psychological and behavioral and that is really driving a lot of what’s going on in the market right now. Or people’s feeling of competition in the housing market, that might be driving demand right now. Not everything is entirely rational and a lot of it is based on market sentiment. So I absolutely love that thing.
And then the second thing I just wanted to call out was her explanation of the “rolling recession”. I think it was the best explanation of the economy that I’ve heard to date. I slacked because Kailyn, our producer and I, we have a little chat going to make sure the show flows well and I said to her, “I think I finally understand economics,” during that part of the show because it was just so … It really helped understand that there’s these waves of economic activity and not everything is the same. We saw this uptick in goods inflation and that calmed down, but then we saw this uptick in service inflation and that is starting to calm down, but that’s a strong employer and why we haven’t seen as much of a decline in the labor market as you might see.
So I thought this was so interesting, and absolutely, if you couldn’t tell, loved her comments at the end about how strategy, whether you’re a real estate investor or a stock market investor, really just has to come from you and your own personal circumstances. I was nerding out about that and very excited about that because I’m actually writing a whole book about that topic for real estate investors. It’s due in two weeks, so it’s all I’m thinking about right now and it comes out in January, so you’re probably going to want to check that out, hopefully.
Thank you all so much for listening. If you love this show as much as I did, please give us a five-star review either on Apple or on Spotify or share this with a friend. Maybe you have someone who’s interested investing in the stock market or just wants to learn more about the economy. I think this is a great episode to share with really anyone. Thanks again for listening. We’ll see you for the next episode of On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Puja Gendal, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions and investment strategies.