Sonders: Base Case is "Rolling Recessions" Through Market Segments

Welcome back to Morning Trade Live. It's time now for the big picture. So let's welcome in Lizanne Saunders, Chief Investment Strategist, Schwab Center for Natural Research. A very good morning to you, Lizanne. So my previous guest, Philip Deal, called this market whistling through the graveyard, which I really liked. Obviously, we've got talk of talks for a ceasefire with no confirmation. We do have the energy risk premium being priced in here and some of the data starting to flash stagflationary warning signals. How would you characterize the markets this week? So I think one of the facets of market action over the past month that maybe gets underreported is just how short term oriented a lot of the money is. It is kind of swirling around in the market and leading to a lot of these rapid fire rotations. And even when you get some sort of actual narrative shift or headline changes, we make assumptions that what's embedded in market action is, OK, the market is now viewing a de-escalation happening in the near term and not a long drawn out military conflict. And I'm not sure that's the calculus at play. There's so much more short term money, gambling oriented money in the market, both on the part of retail traders, but also, you know, CTAs and systematic hedge funds, long, short hedge funds. And I do think that there is some complacency here when you when you broaden out the lens to the impacts if this lasts for a significantly long period of time. And you feel like some of that short term gambling is playing out in areas like the semi the software spread. I mean, it just like looks as if it's a ping pong match going between those two sectors in softwares and hardware. So then, Lizanne, if this conflict is wrapped up soon, do we then go back to the pre-war playbook or has something fundamentally changed in this market? To me, something has fundamentally changed, and it's similar to what fundamentally changed during the worst part of the pandemic when there was this global realisation of the necessity of more diversified supply chains. And that's clearly what we're experiencing now, given that the Strait of Hormuz is a choke point, has no other options. That, of course, has led to a huge buildup of storage and then production shutdowns, not to mention what has happened from a military standpoint in taking out, in the case of Qatar, you know, a big chunk of that LNG capabilities. And, you know, they've already come out and said that's a three to five year rebuild process. You think about the constraints on getting fertiliser through. That cannot be turned back on very quickly. That feeds into crop output and food prices. So I do think that this is for slightly different reasons, especially given what's happened with Ukraine going after a strait that Russian oil comes through. We're sort of exacerbating the problem now, and that has been a little bit kind of second page news. So I do think we're rethinking, especially the supply chain piece of this. Again, circumstances different than the pandemic, but it does have bring with some similarities. So then what is the concern? What is the knock on effect of that sort of long lasting impact then? I mean, you know, is it recession? Because, you know, I've been asking various guests what their checks are telling them. My previous guest said 50 50. You're starting to see, you know, 20, 30 percent chance from, you know, some of the more sort of high profile Wall Street analysts here. I'm just wondering what you're modelling as far as sort of the long term effect in this market then. So I'm not sure you can think about an across the economy recession as having very elevated odds right now. That said, we haven't had a full economy recession really since the global financial crisis. Yes, we had the covid related recession, which is incredibly short lived. What we've had, though, throughout the course of the early part of the pandemic through to the present time are these rolling recessions. You get these sectoral recessions where different pockets of the economy for different reasons come under constraint. We saw that in broad manufacturing only recently seem to be pulling ourselves out of recession conditions in manufacturing. You had the offsetting strength on the services side of the economy. So my base case at this point is that we will continue to have these rolling recessions. Somewhat obviously, as we look at the current backdrop, sustainable increase in oil prices or sustainably high oil prices could feed into sectoral recessions in some of those consumer oriented areas or companies that have energy costs as a big part of their input. So I think that's the way to think about recessions is the possibility that they continue in this rolling way. There are opportunities within the market, given what you're saying here. You have said that the Fed is in a pickle. So let's talk about some of the headlines we got this morning. Jobs to 10k. Good news can perhaps breathe a sigh of relief on that front. But then, Lizanne, you get the OECD expecting inflation of four point two percent versus two point six percent. How much of a pickle is the Fed in? Oh, very much so right now. Now, I think it is somewhat pre premature to assume that the market is right in pricing in a rate hike. That is not our base case at this point. The Fed, of course, is still data dependent. We get new data points every day, but they are they are at the mercy of operating with a dual mandate. Most global central banks only have a single mandate, which is inflation. And that's why you're seeing this upward pressure now and assumptions about needs for tighter monetary policy, because the Fed has that second mandate of the labor market. To the extent we see continued weakness in the labor market, I think that reinforces worst case scenario that the Fed just stays on on hold. I don't think it would be there in their inclination, even with energy fueled inflation in an environment where we see significant weakness in the labor market to consider hiking rates. That said, if we are able to see a maintenance of this incredibly resilient labor market claims being a leading indicator proxy for that, then I think you do need to start to consider maybe that the Fed has to think about tightening policy. It's a tricky balancing act. Lizanne, thank you so much for joining us today. Really, really insightful. I really appreciate your analysis. Lizanne Saunders, Chief Investment Strategist, Schwab Center for Financial Research.