The US housing market is in recession - and the pandemic has created a unique economic headache, elite strategist Liz Ann Sonders says

• Liz Ann Sonders warned that housing and other parts of the US economy are in recession.
• Charles Schwab's chief economic strategist said the pandemic paved the way for soaring prices.

Experts are struggling to explain the US economy's stubbornly high inflation and resilient job gains during a period of surging interest rates. Liz Ann Sonders may have the answer.

Charles Schwab's chief investment strategist has suggested the COVID-19 pandemic, and authorities' response to it, have caused a "rolling recession" where some sectors are booming and others are slowing sharply. They've also fueled historic inflation and created a tough backdrop for stocks, she said.

"You've got recessions in areas like certain segments of consumer goods, certainly in housing," Sonders said during a recent episode of "The Prof G Pod with Scott Galloway."

"But we've had the more recent offsetting strength in services," she continued, adding that strong demand for service workers plus wider labor shortages have shored up employment.

Product of the pandemic

The coronavirus snarled global supply chains and spurred governments to impose lockdowns, restrict travel, and temporarily shut down entire industries in 2020.

The massive disruption prompted the Federal Reserve to buttress the US economy with rock-bottom interest rates and corporate-bond purchases. The Treasury also issued stimulus checks to households and provided federal loans and grants to businesses.

The upshot was that many Americans ended up with lots of spare cash and little to spend it on, which Sonders described as "the breeding ground for the inflation problem."

Indeed, the pace of price increases surged to 40-year highs last summer, leading the Federal Reserve to hike interest rates from nearly zero to upwards of 4.5% over the past year.

Higher rates typically cool price growth by encouraging saving over spending and raising borrowing costs. However, they can also weigh on asset prices and erode both growth and employment, increasing the risk of a recession.

Sonders framed the pandemic as an unprecedented shock to the system that had unique consequences. As a result, she cautioned against relying on past economic cycles to gauge the risk of a recession, or to chart the future path of Fed policy.

"We maybe don't rip up the historical playbook, but take a lot of it with a grain of salt, because it's just different this time," she said.

Recession, inflation, and winning stocks

Sonders sounded the recession alarm during the interview. She singled out the housing market as particularly vulnerable, given valuations and mortgage rates are closely tied to interest rates. While prices have held up relatively well so far, sales volumes of existing homes have dropped, she noted.

The veteran strategist also pointed to the current wave of high-profile layoffs, and growing pessimism among consumers, CEOs, and homebuilders, as further evidence of a downturn.

Separately, Sonders predicted inflation would gradually cool, but likely remain a threat for years to come.

"I've been using the acronym 'GEL' — everything kind of gelled in that 20-plus year period leading into the pandemic, because not just the US, but the world had access to cheap goods, cheap energy, cheap labor," she said, adding that's no longer the case.

Sonders also offered some advice to stock pickers today. She suggested they look for companies that can thrive during periods of inflation, recession, and elevated interest rates.

Specifically, she recommended businesses that can raise their prices, grow their dividend payments, don't have to borrow or raise much money, and manage to beat Wall Street's earnings forecasts.