How Can You Steer Your Portfolio Through a Recession?

MARK RIEPE: A few episodes ago, I talked about NASA's double asteroid redirection mission. On September 26th, 2022, a spacecraft was purposely crashed into an asteroid to influence its trajectory, and it worked. For the first time, humans had intentionally changed the motion of a celestial object.[1] We brought this up as an example of how small changes made well in advance can help avert problems down the road. In the case of the DART mission, NASA was trying to show that a small change in trajectory of an object millions of miles away could, over a long period of time, cause that object to miss flying into Earth and causing a global cataclysm.

This applies to your financial life because small actions taken early can make a big difference when it comes to things we're all concerned about, like retirement planning. Consistently putting aside some of your paycheck for retirement from the start of your career can result in a substantial nest egg when you're ready to retire.

I'm Mark Riepe, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decisions and the cognitive and emotional biases that can cloud our judgment.

I brought up the DART mission again for a couple of reasons. First, it's inherently cool that people are able to launch a rocket off a planet like Earth that's moving rapidly through space and manage to hit a rock 6 million miles away that's also moving rapidly. Second, it reminded me that space people can get really obsessed with the labels that are attached to objects, and that obsession with labels occurs in financial markets, as well.

Pluto was discovered in 1930 by Clyde Tombaugh, a young assistant at the Lowell Observatory in New Mexico. It was named by an 11-year-old English school girl named Venetia Burney, who had just finished studying the Roman gods. Her grandfather read about the discovery of a new planet and wrote to the observatory with her suggestion. Incidentally, around the same time, a young animator who was fascinated by space had just come up with a new cartoon dog, and while there's no direct evidence, there's plenty of conjecture that Walt Disney named the new pup after the new planet. The Disney association gave the new planet even more attention in positive PR.

In 2006, outrage erupted when Pluto lost its planetary designation and was reclassified as a dwarf planet. How does a planet lose its standing after 76 years? The reason is that astronomers examine space beyond Pluto in what's called the Kuiper Belt. This is an area full of icy objects that are a lot like Pluto, and at least one of them was even bigger than Pluto, which some scientists thought should be the tenth planet. The organization in charge of naming celestial objects, the International Astronomical Union, or IAU, didn't have a formal definition of what constitutes a planet. The informal criteria seemed to be that if a body orbited the sun and was massive enough for gravity to shape it into a round form, it was a planet. If the IAU stuck with this criteria, the new powerful telescopes would be stumbling upon hundreds of new planets in our solar system floating out in the Kuiper Belt.

The sense of the IAU seemed to be that there shouldn't be so many planets, and so a new criterion was added. An object needed to have enough gravitational pull that it could clear its neighboring region of other objects. That's where Pluto failed and lost its standing. Late night comedians were unhappy and ridiculed the IAU. At New Mexico State, where Clyde Tombaugh, the man who discovered Pluto, had taught, students took to the streets in protest. The New Mexico Legislature declared Pluto was a planet within state borders. Clyde Tombaugh was from Illinois, and so Illinois followed New Mexico's lead. Hundreds of planetary scientists signed a petition refusing to accept the IAU definition, including a leading expert on Pluto.[2] When New York's Hayden Planetarium moved Pluto away from the other planets in its solar system exhibit and put it with icy comets in the Kuiper Belt, it got hate mail from third graders.[3]

I actually need to pause on that last part. Do third graders really have such strong opinions about Pluto's status that they start writing letters, or do their parents and teachers have strong opinions and put the kids up to it?

Anyway, the point of all this is that people pay attention to labels that we stick on things, which kind of makes sense, but it's also a bit strange. Whether Pluto is or isn't labeled a planet doesn't change the fact that it's this mass of rock and ice that's orbiting the sun. The label doesn't matter to Pluto, but it has significance because we give it significance, and it isn't just professional and amateur astronomers who exhibit this behavior.

Even investors get into the act and have been shown to place an undue emphasis on names and labels. Many of you remember the stock market's dot-com craze of the late 1990s. In those years, investors bid up the prices for seemingly every company associated with the internet. What was especially strange was that some firms changed the name of their company to get the words "dot-com," "dot-net," or "internet" into the name of the company itself. Almost all of the companies who did this didn't change anything about their company; they just changed the name. The weird thing was that investors rewarded the companies. A study[4] of 95 name-changing companies in 1998 and 1999 showed massive increases in the stock prices of the companies even after controlling for many other variables. Another study found that mutual funds that change their name to reflect a hot style of investing experience an enormous increase in the money coming into the funds after the name change, even though there was no change in fund performance.

Finally, in my favorite study of this type, a set of authors developed what they called a fluency score for the names of companies.[5] The idea was that names that are short and easy to pronounce would get high scores, and those with long, difficult-to-remember and difficult-to-pronounce names would get lower scores. The hypothesis was that investors would prefer names that had a high fluency score, and that's exactly what they found. In other words, companies with short, easy-to-pronounce names traded for higher valuations than firms with low fluency scores after controlling for all kinds of other factors. The point of all this is that labels don't change a thing itself, but people act as if those labels have meaning.

A couple of labels we've been hearing about lately are "bear market" and "recession," but what exactly are they? As we're recording this episode, politicians and economists are arguing whether we're in a recession. But does calling the economic state we're in one thing or another change the economy?

To help us make more sense of the markets and the names we use for economic conditions, I'm happy to welcome Liz Ann Sonders back to the podcast. Liz Ann is our chief investment strategist and a keynote speaker at numerous industry conferences. She's regularly quoted in financial publications, including The Wall Street Journal, The New York Times, Barron's, and the Financial Times. She appears as a regular guest on CNBC, Bloomberg, CNN, Yahoo Finance, and Fox Business News. In addition, Liz Ann has been named the Best Market Strategist by Kiplinger's Personal Finance. Barron's has named her to its 100 Most Influential Women in Finance list, and Forbes has her on their 50 Over 50 list.

Welcome back, Liz Ann. This episode is about recessions and the impact they have on investors. I think we've all heard the term before, but just to make sure we're on the same page, can you give us a quick definition? What is a recession?

LIZ ANN SONDERS: Sure, and thanks for having me, Mark. And I apologize for my deep voice, a little under the weather. But since the, I think it's 1978, the National Bureau of Economic Research, the NBER, has been the official arbiters of recessions, and they have a somewhat precise but open-ended definition that you can find on their website, and it's a significant decline in economic activity that is spread across the economy and that lasts more than a few months. And the variables that the committee tracks include the four coincident indicators, which are real personal income, not including government transfers; employment; various forms of spending, business and consumer spending; and industrial production. So what it is not is two quarters in a row of negative GDP.

MARK: Yeah, there's no formula there. It's like a committee's judgment. And, in fact, as we're recording this, there's a fierce debate about whether or not we're actually in a recession. And I guess my question is, are we paying too much attention to these labels? I mean, I've heard you say things like, you know, the economy is what it is—it doesn't sort of depend what label we put on it. At best, we're in a low-growth economy, and any label isn't going to change that. So could you expand on that a little bit?

LIZ ANN: Sure. And that has more to do with the timing of you and I having this conversation, Mark. If this was the beginning of 2022, and market was at all-time highs, the S&P and the NASDAQ and Russell were not far off of it, and fourth-quarter economic growth via GDP was 7%, then I'd say the debate of recession/no recession really would matter. But in a bear market, with the first half of the year's growth in negative territory, whether, ultimately, it gets defined as a recession with the purity of the label from the NBER may not matter as much as that distinction would have mattered at the beginning of the year. What's interesting is bear markets that have a recession associated with them, the differential—versus not having a recession associated with them—the differential in performance is only a few percentage points. What does tend to make a big difference is the duration of the weakness in the market. So that's where maybe whether it's a recession or not might matter, is how long it takes for us to get out of this bear market, this slog that we're in.

MARK: One more thing on this definition side of things. I've heard pundits attaching kind of labels to the recessions. I've heard things like rolling recessions, earnings recessions, growth recessions. What are they talking about? What are they trying to convey by using those modifiers?

LIZ ANN: Sure. So growth recession tends to mean a period where growth does decline quite sharply, and in some cases, into slight negative territory, which is what we saw in the first half of the year, but not sufficient enough to ultimately be declared an official recession. So that would be generally what a growth recession is. A rolling recession, which I think is maybe a descriptor of the environment we're in, is unlike periods like the COVID recession in 2020 or the financial crisis-related recession from late '07 to early '09 or to mid '09, that was a time where the economy, the bottom fell out collectively, kind of all at once. Where the unique nature of this slow down, this recession, whatever we call it, is such that it's happened over a span of time where pockets of the economy get hit at different times. You saw the growth surge in the economy on the goods side when all the stimulus kicked in, and all of that demand and stimulus had to be funneled onto the goods side of the economy because there was no access to services. That was the breeding ground for inflation, on the goods side. Now we've shifted the demand to the services side of the economy, and that's where the sticky inflation is. So that's the notion of a rolling recession. It sort of happens over time.

As far as the earnings recession, that tends to come after the slowdown in economic growth. And I think that is a risk still ahead of us. We've started to see some deterioration in estimates, but I think the path of least resistance is still down, probably to a point where we have a negative year-over-year change at some point.

MARK: Yeah, earnings, we're talking about company earnings. I want to circle back to that at some point a few questions from now. I want to go back, though, something you just were talking about in terms of the influence of, you know, bear markets and recessions, or the influence recessions have on bear markets, because I think you and I have probably had the same experience, where we'll be doing client events, and then implicitly clients are kind of equating the two, where they think a recession is a bear market. They're related, but they're not really the same thing. So how should investors think about them in relationship to one another?

LIZ ANN: Well, they're certainly not the same thing. Bear markets are about the stock market. And, typically, the decline is of at least 20% to qualify for one if you're using a simplistic definition. We already talked about the definition of recession. Now, yes, more often than not, they do overlap. They come about in what would be called the same cycle, but not always. And, interestingly, when you have had bear markets that have been accompanied by recessions, most of the time the bear market starts first, and then the recession is, ultimately, dated as having started. And, typically, bear markets end before recessions end. But there are situations where we've had bear markets. It happened in the World War II, coming out of World War II era, '46, '47. That was a bear market that was not accompanied by a recession. You actually had two bear markets in the '60s, one from '61 to '62, another one in 1966. There was no bear market associated with those, or there was no recession associated with those. And then, of course, maybe more recent would be the crash of '87, clearly a bear market in a condensed period of time, but no recession. But over the long course of history, more often than not, they do accompany one another.

MARK: One of the decision-making biases we'll periodically talk about on the show is how people will take current conditions and they'll just assume those conditions will continue. So if the economy is strong, people will just think the economy will be strong forever. If it's weak, they'll kind of extrapolate that on forever. And that's, of course, kind of a recipe to always get surprised when economies and markets go through, you know, their normal cyclical movement. So you've got a solution to this that involves really paying attention, not so much to the levels of the key variables, but the changes in the trend. Could you explain what that means and how it applies to what we're going through right now?

LIZ ANN: Sure. And I think, you know, when you started the question, Mark, you were giving an example of what we know as recency bias. But specific to the latter part of your question, it's the whole notion of level versus trend. And as you know, Mark, one of my mantras for decades in this business is when it comes to the relationship between data, whether it's economic data or corporate earnings data, and the stock market, better or worse tends to matter more than good or bad. And it's sometimes just a subtle change in direction that the stock market picks up on, that if as a market watcher or an economy watcher, if you are looking at data through lenses of good or bad, or strong versus weak, you might not pick up on that subtle change. And I mentioned that the stock market has tended to lead both going into recessions and coming out of recessions. That's one of the reasons is that the market has a pretty uncanny ability to sniff out what you can think of as inflection points in the data. So when the data stops getting worse and starts getting better, in the case of a move up, and the opposite. But if you think about it, by definition, if you're at the top of the V, the data has stopped getting better—it's just starting to get worse—in level terms, the data still looks quite good. Conversely, when you're at the bottom of the V, and things have started to improve, but you're still low, in level terms, the data looks quite poor, quite weak. But the market tends to key off that subtle rate of change.

So, looking at the trend, excuse me, and indicators is at least as important as looking at the level, especially because if you wait until the level of data is great, you've probably missed a lot of the bull market, and vice versa on the way down.

MARK: Liz Ann, we're old enough to remember the early '80s, which was the last time we saw inflation rates in the U.S. like we're currently seeing. The Fed then, as now, decided that to tame this we're going to need to raise interest rates pretty dramatically. Two back-to-back recessions resulted. Is history repeating itself?

LIZ ANN: Well, I guess the short answer is I hope not. And I think that's the answer just about anybody would give. There's certainly a lot of comparisons being made now between Jerome Powell at the chair of the Fed and Paul Volcker at the time. And we don't know, ultimately, what the end result is going to be. Powell has been pretty open and honest recently about the possible necessity of a recession, although, as is typical of the Fed, they don't use that word. Powell's chosen word recently has been "pain." So let's assume that that's code word for recession. In an ideal world, if that is what is necessary, we only have to suffer through one of them and not the back-to-back version that we had in the 1980s. I think one of the problems in that environment is some of the fits and starts of monetary policy during the 1970s kind of pulling the so-called, you know, monetary foot off the brake a little prematurely. And that allowed inflation to reignite. And I think that's ultimately what led Volcker to have to be as aggressive as he did. And there were a lot of other unique conditions in the 1970s that sat behind why inflation did what it did, that in many cases don't exist today. We don't quite have the kind of wage price spiral that existed in the 1970s.

So the hope, and at least our base case, is that although recession is quite likely, there's certainly no given that we have to suffer through two of them, especially since we're not all that far from the COVID recession. And a lot of the vagaries of this cycle are due to the ongoing effects of the pandemic. So, if this is a so-called back-to-back, let's hope the first one was in 2020, and the next one is over sooner rather than later.

MARK: I think these statements from the Fed are interesting. You've got, you know, Powell, for example, as you just mentioned, talking about pain. Maybe that's a euphemism for a recession. We've got other Fed officials who will say things like, "Yeah, we've got to tame inflation, but we think we can avoid a recession." I guess, what's the Fed's track record when it comes to guiding the economy into these so-called soft landings?

LIZ ANN: Well, if you go back to the creation of the Fed in, I think it was 1913, kind of pre-Roaring Twenties, there have been 13 official rate hike cycles that were actual cycles. There have been a few times in history where the Fed might have raised rates once or twice but then had to back off because of conditions. So the 13 cycles are true cycles where it was in a somewhat extended period of time of multiple rate hikes. So out of those 13 rate hike cycles, there were 10 recessions and three soft landings. So just the simple math of history suggests that recession is more likely. And I think in the current environment, when you add a pandemic that sadly is not fully in the rear view mirror, the first ground war in Europe since the 1940s, the Fed tackling or trying to tackle an inflation problem that's already out of the bag with a 41-year high in inflation, while also simultaneously trying to shrink a $9 trillion balance sheet, I'm not sure that given history and all of those aforementioned forces this time, that that has the needle pointing more towards soft landing. I think that has the needle pointing more toward recession. And I think the best-case scenario might be what we already touched on, which would be a rolling recession that might not, ultimately, be declared an official recession, but one that exerts kind of pain in the economy nonetheless, just over a more unique span of time.

MARK: Another thing that makes this difficult for any policymaker is just the fact that it's … you know, it's hard to forecast the economy. So what are some of the guides that people should be looking at? What are some of the markers and the metrics that you're looking at to figure out where we are in the cycle?

LIZ ANN: So, to answer in general first, and this would be an answer I would give if it was the prior cycle or the cycle prior to that, pretty much at any point in time. I think when trying to gauge where we are in an economic cycle, one of the most important things to do is understand which data points, which indicators fall into the leading indicator category versus the coincident indicator category versus the lagging indicator category, because, obviously, it's the leading indicators that are going to give you more of a heads-up. And, unfortunately, some of the more popular economic indicators fall into either the coincident or lagging camp.

In the case of lagging, a perfect example of that is the unemployment rate. It's probably the economic data point about which most people are at least somewhat familiar. It affects everybody individually, if not directly, at least indirectly, yet it tells you pretty much nothing about the prospects for the economy looking ahead. It's a very good picture of what the economy has done versus payrolls, which is another popular labor market indicator. That is coincident at best and has some lagging tendencies to it versus another labor market indicator, like initial unemployment claims.

There's a number of other leading economic indicators that span different parts of the economy. You've got the yield curve is one of them. Not every housing statistic, but building permits, in particular, manufacturing PMIs like that put out by the ISM, in particular, the new orders components. So just understanding what sits in those batch of leading indicators, but then also keying into what makes each cycle unique. And in this cycle, the pandemic has made this quite unique. In fact, the New York Fed came up with a leading index a few years ago called the Weekly Economic Index. It's more frequent than the typical leading economic indexes, which are monthly in nature, and brings in some metrics that are a little bit more tied to the specific impacts that the pandemic has had.

So you always want to be mindful of what has been a driver of the current cycle. Housing has clearly been a factor in this one, so maybe put a little bit more emphasis on housing-type indicators, some of the pandemic-related indicators, and add that into the mix of other leading indicators.

MARK: I want to talk about housing in a second, but before I go there, I wanted to ask you about the labor market because the labor market has been one of the healthy spots of the economy. We've got some economists saying, "Well, you know, we can't be in a recession because the labor market is so strong." What is your take on that?

LIZ ANN: It is, for the most part, the labor market is strong. Actually, I'm a column contributor to the Financial Times, and a late September column that got published was actually on some of the cracks that recently started to appear in some of the labor market data, not necessarily in those headline measures of payrolls, although they have been trending down for the most part since recent peaks. The unemployment rate, the recent tick up in that doesn't really suggest serious problems in the labor market. But if you kind of peel at least one layer of the onion back, if not a couple of layers, you see a few cracks. There's been a deterioration in the number of hours worked, and maybe, obviously, that is one of the first things that employers might do, is cut the hours before they cut the people, especially given what has been a tight labor market and the difficulty for many companies in hiring the people that they needed with the skills that were needed, there may be more hesitancy to lay people off in this cycle. But the cut in the work hours worked, I think is maybe a little bit of a canary. You've also seen a decline in full-time work. At the same time, you've seen an increase in part-time work. There's also the Household Survey from which the unemployment rate is derived, and what gets picked up in that is multiple job holders. And that has been increasing over the last four or five months, and the number of people with additional jobs or working part-time for economic reasons does show strains in the economy that are starting to impact the labor market. And then the last one is just the increase in year-over-year terms in layoff announcements that are published by Challenger.

So those are just some of the under-the-surface indications that maybe suggest the labor market has seen some deterioration that wouldn't necessarily be picked up by those more popular headline monthly readings.

MARK: Let's go back to housing for a second because, as you mentioned, it's a big part of the economy. Frankly, it sort of seems like it's falling apart, which, of course, was a big problem in 2007-2008. Why is housing having such a tough time, and what does it tell us, if anything, about the future above and beyond what you were just talking about, in that some of the leading indicators have a housing component to them?

LIZ ANN: So the pandemic was a significant boost to housing demand, in some part, not all part, due to the advent of hybrid working structures. It also came at a time where we were seeing growth in household formations based on demographics. But when you think about housing affordability, it has, basically, three … it's a three-legged stool. You've got mortgage rates, you've got home prices, and then you've got incomes, not so much in nominal terms, but in real terms. And, unfortunately, we've knocked all three of those legs out from under the stool. Mortgage rates have gone up significantly over the past year or so, even less than that. You've seen a massive surge in home prices until recently. And then, even though wage growth has been fairly strong and income growth remains decent, both of those growth rate numbers are lower than inflation. So, in real terms, you're in negative territory.

To just put some numbers on it, at the recent lows in the mortgage rate for somebody putting, you know, a 20% down payment, and they wanted to have a mortgage payment of around $2,500, they could have bought a house in the high 700 range when mortgage rates were at their low, and that's been chopped down to about $475,000. So it's really been a bit of a triple whammy, and you're seeing it across the spectrum of indicators. For anybody that might have focused on what was a big jump in housing sales reported in September, one caution there is that's put out by the Census Bureau, and it's exclusive of cancellations, which have skyrocketed. So, ultimately, that gets revised to be a net number, but that at turning points in the cycle can overstate actual sales. So that's an important caveat, if anybody is focused on that recent number as a sign that maybe housing isn't still in a down trend.

MARK: Thanks, Liz Ann. And for the stock investors who are in the kind of listening audience, not surprisingly, they pay a lot of attention to the earnings of companies, not only the actual earnings, but the projections of those earnings. To what extent are analysts starting to reflect in their estimates everything we've been talking about in terms of where the economy is at and where it's going?

LIZ ANN: Sure. They have started to reflect it, but I think there's, unfortunately, probably more to go on the downside. So around the mid-June period of time where we're getting close to the end of the second quarter, it also corresponded to, at least at that point, a bottom in the stock market in advance of a couple-month rally. Estimates for calendar year 2022 were close to $230. That's the dollar amount of earnings for the overall S&P index. To put that in contrast to 2021, 2021 was 208. So that would suggest a pretty decent growth rate. However, what was $230 back in mid-June is now down to $223, and I think still has a ways to go on the downside. Maybe not for calendar year 2022, to a dollar amount lower than last year, but I don't think it's a stretch to think that sometime in the next few quarters that we move into negative year-over-year change territory for earnings, in large part because the strength that preceded this recent move down was so significant that just what they call the base effects of the year-over-year comparisons get tougher because you're going against strong numbers.

And we did see some weakness in the second quarter. Overall S&P earnings were up by about 8%, which is a decent reading, but more than all of that was accounted for by the energy sector. So, if you exclude energy, the second quarter earnings were actually down 2%. So that negative change already kicked in if you are excluding the energy sector in the second quarter.

I think third-quarter earnings season, once it gets significantly underway and you start to hear more from companies, then I think analysts will be equipped with better information, and unfortunately, probably means estimates still have some room to go on the downside.

MARK: Yeah, and I think one of the difficulties about being an investor is, to a certain extent, some of the data and the trends we've been talking about, those are reflected in stock prices. And that's why, as we're recording this, I think for this year, the S&P is down 22, 23%. So, what's your advice for investors? What should they do, given that we're in this weak growth period at best, and we still have a Fed that's emboldened to continue with what they're doing and continue to fight inflation?

LIZ ANN: Well, Mark, you probably know what I'll say at the outset, because I've written reports and updated them many, many times over the decades, which is don't panic. Panic is not an investing strategy, so do keep that in mind. Another broad piece of advice is, make sure you have a plan and it is tied to your risk tolerance.

But on the subject of risk tolerance, I think one of the things that investors often find out in a tougher market environment is that their financial risk tolerance, which is what figuratively goes on paper, they might sit with their advisor, their consultant, and based on time horizon, past experience, need for income, all of those things, that's your financial risk tolerance. But when met with a tough market environment, unfortunately, investors will sometimes find out that their emotional risk tolerance is quite a bit different than their financial risk tolerance. So try to assess whether there's a wide gap between those two or a narrow gap between those two.

And then in terms of trying to gauge, you know, are we closer to a bottom? As you know, Mark, we don't try to pick tops and bottoms. That's just market timing based on moments in time, and investing should always be a disciplined process over time. But I will give you maybe some checklists, and this is not a "if you check all of these, you're guaranteed to have the bottom in and it's smooth sailing as far as the eye can see." But what you tend to want to see, especially if you go through what we have been going through, which is a retest of the June lows, if you even maybe retest and go lower than that, one of the things that tends to happen when the market is finding a bottom is breadth conditions, meaning the percentage of stocks trading at new lows or the volume in the rising stocks versus the falling stocks, there's a number of kind of internal breadth measures. Those in the past have started to improve even as the market is retesting or going below lower lows. So that's sort of the better or worse matters more than good or bad, but bringing it into the technicals of the market, kind of an under the surface, things are getting a little less bad, even though closing prices don't look that way.

And then specific to the economy, I think we probably need to see some stabilization in earnings estimates, which we already talked about, some stabilization in housing, which we talked about. And then stabilization in the leading indicators, especially things like the PMI, like the ISM, manufacturing and services.

So those would be a bit of a checklist of the kinds of things I'm looking for to feel a little more confident that we're getting closer to the end of this.

MARK: Yeah, the good news is that, you know, economies do tend to recover, markets do tend to recover. It's very difficult to kind of forecast that recovery, but one of the things I think we've talked about, maybe not on this show but in other contexts, is that market recoveries tend to be front-loaded, that if you wait for the "all clear" sign, probably you've missed a lot of the rebounds. Right?

LIZ ANN: No doubt about it. And, in fact, especially if you're looking at a lagging indicator like the unemployment rate. If you were to look at a long-term chart of the unemployment rate, and I've certainly showed this in myriad reports, and then put recession bars overlaying that, what you'll see is the unemployment rate is near its low point in each cycle when the recession starts, and not only is at a high point at the end of a recession, is typically still rising. And then when you think about the stock market leading recessions, if you're using a lagging indicator like the unemployment rate and saying, "I'm going to wait until the unemployment rate is, you know, back down to 4%." If you're at, say, 10% like we were in 2009, you've missed a heck of a lot of the bull market. And/or, conversely, if you're staying in the market or you are sort of whistling past negativity and saying that, you know, this bear market is not going to be over until we see more deterioration in the unemployment rate, the bear market ends, typically, in anticipation of the change in a lagging indicator.

So just understanding the relationship between the stock market as a leading indicator for the most part, and then the data and what is most lagging in nature. Sometimes if you're focused on that good or bad in the economic data, you really can miss opportunities on the upside.

MARK: Liz Ann Sonders is Schwab's chief investment strategist. You can follow her on Twitter, @LizAnnSonders. You can also go to schwab.com/lizannsonders to see a collection of her pieces. That's schwab.com/l-i-z-a-n-n-s-o-n-d-e-r-s. Liz Ann, this has been great. Thanks for being here today.

LIZ ANN: Well, thanks, Mark. Thanks for having me, and thanks for putting up with my slightly different voice today.

MARK: We've talked on past episodes about the difficulty in making forecasts. A couple of perils frequently crop up. First, people are overly optimistic. Second, people take current conditions and extrapolate them too far into the future. But just because planning is difficult doesn't mean that it makes sense to simply refuse to do it. When it comes to steering your portfolio through rocky waters, one thing that can make a difference is to prepare for different scenarios. If you're presented an opportunity to take on more debt, think twice about that. Make sure you understand the interest you'll be paying and the consequences if you don't.

The second is to think about your human capital. That's a wonky term for your knowledge and skills. For most people, their human capital is actually the most valuable asset they own. So far, the slowing economy hasn't had much of an impact on the labor market. But when recessions hit, labor markets don't escape. The unemployment rate goes up, raises are harder to come by, and company bonuses shrink. If this affects you, how will you cope? Is your emergency fund in good shape? If you're employed now, what if your job is at risk? Remember that the older you are, the longer it takes to get a new job. Are you prepared for that?

Third, how will you approach your spending? People usually change their spending habits during a recession. Impulse spending goes down. People in past recessions have shopped smarter, concentrating more directly on the products they truly desire, and then relocating their budgets to make such purchases possible. The same principle can apply to larger purchases, too.

My fourth and final point is to take a close look at your portfolio. We suggest paying closer attention to quality names. These are stocks issued by solid companies whose stock prices are backed by strong earnings power and less by promises of ephemeral technologies of the future that may or may not come to pass. The same applies when buying bonds. Pay more attention to issuers who have solid credit histories that can withstand any downturns in future economic fortunes.

Finally, this is an unusual period of time. The amount of macroeconomic, geopolitical, and social change is enormous, and that means conditions can change rapidly. We have professionals at Schwab working to help you understand what really matters in the news. You can always get the latest research and education at schwab.com/learn.

One of those professionals is our guest today, Liz Ann Sonders. She posts tons of insights and data analysis on her Twitter page, @LizAnnSonders, all one word, and at schwab.com/lizannsonders.

Thanks for listening. If you've enjoyed the show, please leave us a review on Apple Podcast. We'd also love a personal recommendation, so if you know someone who might like the show, please tell them about it and how they can follow us for free in their favorite podcasting app.

If you prefer your podcasts on YouTube, we have some of our previous episodes posted there, as well. Just go to youtube.com/charlesschwab. That's all one word. Youtube.com/charlesschwab or search for Financial Decoder. And if you want more of the kinds of insights we bring you on Financial Decoder about how to improve your financial decisions, you can also follow me on Twitter, @markriepe, m-a-r-k r-i-e-p-e.

For important disclosures, see the show notes in schwab.com/financialdecoder.

[1] "NASA Confirms DART Mission Impact Changed Asteroid's Motion in Space," NASA, press release, October 11, 2022, https://www.nasa.gov/press-release/nasa-confirms-dart-mission-impact-changed-asteroid-s-motion-in-space/

[2] Neil deGrasse Tyson, "The Pluto Files," NOVA, aired December 14, 2011 (transcript), https://www.pbs.org/wgbh/nova/space/pluto-files.html

[3] Lewis, Susan K., Hate Mail from Third Graders, NOVA, posted January 2, 2010, pbs.org/wgbh/nova/space/hate-mail-pluto.html

[4] Michael J. Cooper, Orlin Dimitrov, and P. Raghavendra Rau, “A Rose.com by Any Other Name,” Journal of Finance. 2001.

[5] T. Clifton Green and Russell Jame, “Company Name Fluency, Investor Recognition, and Firm Value,” Journal of Financial Economics, 2013.