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Odds higher for U.S. recession: Schwab strategist
Cash, bonds, large-cap stocks recommended as top defensive investments
By Paul Lin
Last Update: 4:03 PM ET Sep 6, 2006


NEW YORK (MarketWatch) -- The odds of the U.S. economy slipping into recession within the next year have climbed to 50% and investors should stay defensive, Liz Ann Sonders, Charles Schwab & Co.'s chief investment strategist, said Wednesday.
In a MarketWatch interview, Sonders recommended paring back small-cap and international stocks by 5% each in a portfolio geared toward moderate risk, while emphasizing healthcare and consumer staples holdings.
Click here to watch interview with Sonders.
Investors should overweight their cash positions as well by as much as 10 percentage points, she suggested. Other allocations: 35% bonds and 35% large-cap equities.
Click here for related story on recession-proofing your portfolio.
Recent housing data showing a slowdown in home sales as well as continued high oil prices have contributing to slower economic growth, she said. Beyond that, there's also the inverted Treasury yield curve.
"If the duration lasts for three months, in every case we've had a recession," said Sonders, pointing to the spread between the 3- month Treasury bill and the 10-month Treasury note.
A 50-50 chance for recession would be more bearish than other recession models. One model for recession predictability put the odds of recession at greater than 25%, while a model the Federal Reserve uses put the likelihood of recession at closer to 40%, Sonders wrote in a research note to Schwab (SCHWCharles Schwab & Co., Inc.
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Moreover, September historically has been a cruel month for stocks. Stocks have lost ground in September 60% of the time over the past 100 years, according to economist and MarketWatch columnist Irwin Kellner. Trading this September may also be affected by speculation ahead of the mid-term elections, Sonders added.
All of this makes a complicated backdrop for the next Fed meeting on September 20. "It should be a very interesting meeting," Sonders said. "The market is on watch right now to see whether the next move is a hike or a cut. If that inflation pressure hangs around even in the face of still-deteriorating housing, they're likely to stand pat, and not give us that first cut as quickly as a lot of market participants would like."