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Despite vaccine progress, ‘economic data can get worse before it gets better’, says strategist

Liz Ann Sonders, Charles Schwab & Co., Inc.'s Senior Vice President and Chief Investment Strategist, joins Yahoo Finance to discuss Monday’s market rally, and why even though the latest news on the vaccine front “represents the light at the end of the tunnel,” from the economic stand-point in the near-term, “we’re still in the tunnel.”

Video Transcript

- But let's just kind of go through the violent reaction we really saw in markets yesterday morning and the way that the market traded throughout the day where we saw a pretty durable rally in the small caps, in the banks, and everything else came under pressure. What did you make of that dynamic, and how do you see this rotation trade kind of playing out?

LIZ ANN SONDERS: Yesterday really was a remarkable day, and I think that the narrative around small caps and value doing well, there's nothing untrue about that. But if you look under the surface a little bit, you'll see really what happened was that unbelievable outperformance by the energy sector in the financials. And the energy stocks are almost nothing in the growth indexes, whether you're looking at S&P Growth or Russell, either large or small growth, but there are between 3% and 4% in the value indexes.

And then financials I think really important because Russell 2000 value has 28%-- more than 28% in financials. So that index was up about 7% yesterday, whereas Russell 2000 Growth was up less than 1%. So that really wasn't a small-cap story. That was a financials story and the differential in weight. So I think we really have to sort of dig into the numbers to get a sense of what the drivers were. Yesterday was also a day-- if you had a great day as an investor yesterday, you probably had a terrible entire year leading into yesterday. It really was an unbelievable reversal.

Now whether it has legs I think will be a function of the economic trajectory, and the hope, of course, is the vaccine maybe either speeds that up or brings it forward from further out in the future. But the problem is even though the vaccine may represent a light at the end of the tunnel, from an economic standpoint in the near-term, we're still in the tunnel. And I fear that the economic data could get worse before it gets better, notwithstanding the very good news that Pfizer had yesterday.

JULIE HYMAN: So, Liz Ann, I guess that tunnel that we're in right now brings us to fiscal stimulus, right, which is another thing that could get us out of the tunnel. And I don't know how much you've participated in the game of trying to figure out if there is going to be stimulus, but one would think you have to factor that into your investment decisions right now. So do you think there is going to be stimulus, and how much of a lift is that going to give to the economy and to stocks?

LIZ ANN SONDERS: You know that, of course, the short answer is I don't know. I'm not-- I'm not inside in Washington looking at these negotiations. I would say maybe one could pin some hope on the fact that in the aftermath of at least the presidential election-- and I know it's not officially decided but close to it at this stage. Mitch McConnell did come out and not only state that fiscal relief was a priority within the lame-duck session timeframe, but also actually had some conciliatory things to say about aid for state and local governments, which was clearly a priority in terms of what the Democrats were looking for. Hopefully that-- that we can infer that that means there is a desire to be cooperative and try to get something done sooner rather than later.

I do think it is still a necessity. You know, it was such a chasm created, and we haven't quite built the bridge to the other side of that. And I think it is necessary, and maybe with the election past us, maybe there's reason for less posturing, kind of pre-election posturing. So that's a hope more than it is a forecast admittedly.

BRIAN SOZZI: Liz Ann, now that you've had some time to process the election, how do you think-- how do you think the next four years under a Biden administration will be different for investors compared to the past four years?

LIZ ANN SONDERS: Well, I think regardless of what would have happened, you know, there's always the game that's played in advance of an election and in the immediate aftermath of what the perceived winners are and losers, often done at a sector level. I think you have to temper that obviously, given at this stage what looks to be a divided government. So some of the extremes on either side are unlikely under those circumstances.

But you also really have to be careful about saying, OK, Biden is good for and then fill in the blanks in terms of sectors. We said the same thing four years ago-- not we meaning Schwab, but in general there was a narrative that given the regulatory changes that were coming down the pike giving a focus more on traditional fossil fuels as opposed to green energy, that energy and financials would be big beneficiaries of a Trump win. Well, four years later they were the two worst performing sectors-- not because the Trump administration did something entirely different. It's just there's so many other forces that come into play.

And I think the force that's most important right now is the virus-- the trajectory of the virus, what normal on the other side looks like. I do think we are seeing a shift in biases within the economy toward the investment side of the economy away from the consumption side of the economy. And I think we were moving in that direction regardless of the results of the election. But I think some of the extreme policy changes that certainly would have impacted investors like major, major tax changes are much less likely assuming we maintain a division in Congress.

- And, Liz Ann, I want to, you know, kind of finish up by going back to something you said earlier, which is that if you had a great day yesterday, you've probably had quite a tough year. And I guess the flipside of that as we look at NASDAQ Futures off almost 2% is if you're under pressure today, you've had a great year. And there's certainly a sense that the NASDAQ, those companies-- that's the future. It doesn't matter. Those guys are going to be fine. What sort of impacts might a more sustained rotation within the market towards value away from growth mean for the top-level indexes where we have a rotation in terms of style-- the index might not go anywhere and it creates sort of an interesting period for investors as you have, you know, a very different dynamic I guess playing out than we saw earlier this year when it seemed like everything went up into the right?

LIZ ANN SONDERS: So there's multiple cohorts we have to look at in terms of how they've been drivers of trading, how they've been reacting to what's going on. You've got the newly minted day traders, which we've all been talking about a lot that have become big momentum players-- certainly drove the performance of many of the most popular names, not least being the big five names that until yesterday anyway were the big drivers of performance-- to see what they do if this rotation persists, whether they just maintain that momentum bias and just shift into the newer names that have that momentum.

On the institutional side, of course, you just have perpetual performance pressure, especially as you get close to the end of a month or end of a quarter, and if it persists, much like it forced many institutions to be in those names, because absent them you had no hope of outperforming the S&P to the extent that that was your benchmark or part of your benchmark because of the weight that they represented. That narrative starts to shift. You no longer have to be in those names, and you have to have participation in some of the areas that were underperformers. So you could see that window dressing happen, maybe not imminently because we're not at the end of a month or at the end of the quarter, but it certainly could represent some pressure as we get closer to year end.