Sonders: Stocks Attractive, But Short Term Could Be Bumpy

Charles Schwab’s Liz Ann Sonders says that while the short-term ride may well be difficult, equities continue to look attractive for long-term investors.

“The U.S. election season will continue to be contentious; while in Europe, a plan to buy distressed sovereign has been structured, but actual implementation, based on history, is likely to be anything but smooth,” Sonders writes, along with Schwab’s Brad Sorensen and Michelle Gibley, in commentary on the firm’s site. “But as long as investors have the proper time frame (three to five years) in mind and realize that there are bound to be some stomach churning moments, we believe equities remain an attractive investment choice.”

Sonders also says that, while the Institute for Supply Management’s manufacturing index has indicated that the sector has been contracting for the past three months, such data needs to be put in context. For one thing, she says, manufacturing makes up less than 15% of the U.S. economy. For another, she says, citing Bespoke Investment Group, 41.4% of the time that the index has been in “contraction” territory since 1948 has not been during or within six months of a recession.

Sonders also says that while the job market remains “murky”, the economy is adding new jobs. And she says that the housing market continues to show improvement, and housing sector improvements are a leading indicator of job growth. She discusses the European debt crisis outlook, China’s slowing economy, and the need for U.S. policymakers to give companies clarity on tax policy and regulations. “With uncertainty regarding the election and the looming ‘fiscal cliff,’ businesses continue to remain on the sidelines, holding back on investment and hiring,” she writes. “While we are confident that the full potential impact of the fiscal cliff will be less than the reported 3.5-4.0% of GDP, the likely short-term fix will only serve to further fuel uncertainty that plagues the market. A sustainable, credible solution that reformed the tax code, cut spending in a reasonable way, and began the reform process for entitlements, would likely be a huge boost to the market, but we’re not holding our breath.”