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Job reports are key in this environment and metrics matter the most if we know the election outcome by Thursday: Strategist

Liz Ann Sonders, Charles Schwab Chief Investment Strategist,

joins the Yahoo Finance Live panel to discuss how the 2020 presidential election results will impact the markets.

Video Transcript

AKIKO FUJITA: We've talked so much about the election scenarios and the uncertainty leading to the volatility, and yet here we are on election day with the markets rallying. What do you make of the gains that we've seen this week, especially given the performance from last week?

LIZ ANN SONDERS: Well, I think some of it may directly relate to the performance of last week, which in turn may have been a function less of election uncertainty, the resurge in virus cases, the sort of knowledge certainly at this point that we're not getting a fiscal-relief package pre-election, and more just catalysts to unwind some of the speculative excess that we had seen built into the pullback that we saw last week.

And I would argue the same thing happened when we hit the all-time highs in early September. Sentiment had gotten quite frothy in certain pockets of the market, specifically single-stock options on the call side by the cohort of newly minted day traders, and I think we saw some of that speculative fervor kick back in prior to the recent pullback.

And then what we've seen-- we saw it in June when we had a pullback. We saw in the three weeks in September. We saw it last week. You then move very quickly into sort of oversold [INAUDIBLE] technical conditions, and it establishes the opportunity for the market to bounce.

So I think the wiggles may have less to do with sort of the catalysts around things like the election and more a function of the background conditions of sentiment and technicals that get stretched in either direction.

ZACK GUZMAN: And you've commented quite a bit in terms of what you're seeing play out of those big drivers of market direction there, and that's been kind of the trend here when we focus in on the big-five tech companies in Apple, Microsoft, Amazon, Google, Facebook. And as you point out, that driver of the market has been down relative to the other 495 names there. Talk to me about what that signals, perhaps maybe even when were talking about this earlier in the show, some valuation pressures here at some of those bigger names-- Apple being one that Dan Nile was flagging us as one that investors might be saying, look, this is just too expensive to justify.

LIZ ANN SONDERS: Yeah, and as I think you guys know, I don't cover individual stocks, but I certainly look at this cohort of companies which, until September 2, had been clear drivers of performance. And I think that helped to explain the perceived disconnect between what was going on in the economy and the market in that because they're so dominant, they were driving the indexes to all-time highs. But, at least as of September 2, those stocks on a year-to-date basis were up a tremendous amount, and the remaining 495 were in negative territory. That's still the case as of a couple of days ago year to date.

But I think the shift that's been underway since the September 2 high is a rotation reflecting valuation concerns, maybe even reflecting the fact that in this world of very little bipartisan support for anything, there is bipartisan support for potentially taking a hard line on some of these monopolistic technology companies. So there's that sort of macro narrative that I think has come into play.

So far, at least since early September, we've had these rotations that occur in conjunction with these fairly mild pullbacks, and a correction in sort of the excess valuation of those names isn't such that it takes the entire market down with it, similar to, say, 1999, 2000 period. That's the benign scenario, and I hope that that's the continued scenario, that we ease some of the excess from a valuation perspective and a momentum perspective and that the implications of that are just a rotation into other parts of the market.

AKIKO FUJITA: And Liz Ann, overlooked in all this election talk today-- although probably certainly not by you-- we've got the Fed meeting kicking off tomorrow. The expectation when you look back to the previous meeting was that Congress would have at least moved in some way on a fiscal stimulus bill. That did not materialize. What are we expecting to hear from the central bank this week? And from a market context, is it expected to be a significant driver if there is so much uncertainty on the political side?

LIZ ANN SONDERS: Well, I think some of what we hear from Powell-- and I continue to think in this environment where we don't expect to get any definitive change in policy on the interest-rate side or any significant change in how they're approaching their balance sheet, I think what happens in the election-- and the simple fact that if we know the results of the election by Thursday, I wouldn't be surprised if Powell continues to do what he has done, which is really kind of press the need for more on the fiscal side.

Not suggesting that the Fed's out of ammunition, that they don't have tools, but essentially saying we've, at this point, done as much as we can, and where the kinks remain in the economy for individuals, for small businesses, the solutions to that are more on the fiscal side than on the monetary side. And I think his ability to be more pointed about that would come if we actually know what the outcome of the election is by the time 2:00 PM Eastern on Thursday arrives.

ZACK GUZMAN: Yeah, and the more we hear about getting this pushback-- I mean, this is something that we've seen play out, kind of a frog in boiling water situation it reminds me of when you think about, oh, we'll get some sort of stimulus agreement between Republicans and Democrats before the election. That didn't happen. Now we're talking about election results taking much longer than I think people expect. What does that do for delaying whatever stimulus bill that could come through on the other side of the election? When you think about consumer confidence and the important holiday spending season here and what that could do to the underlying economy, should we not get that extra shot in the arm?

LIZ ANN SONDERS: So I think in terms of the impact on consumer confidence, not just the measures of consumer confidence but just in general the psyche of what's going on, is not just driven by the election, the outcome, the prospects for a lame-duck fiscal package but what actually happens to underlying economic numbers.

I think jobs reports are always key, even in a normal market environment but particularly key in this environment. And the metrics that I think that matter most is the differential between temporary job losses and permanent unemployment. The former's been coming down. The latter, unfortunately, has been going up. As of the last jobs report, 60% of those folks that are unemployed have been unemployed for at least 15 weeks, so that's long-term unemployment.

I think those are the forces that will weigh on confidence, especially in the absence of fiscal relief. Also whether we go to any kind of formal lockdowns again. That would obviously elevate the need to continue to try to build that bridge over the chasm created by COVID and would support the need for this relief on the fiscal side if we go back even into a portion of lockdowns given what we know happened in the March, April time frame.

So it's more than just the election outcome. I think it's the underlying economic fundamentals that will drive the need for that fiscal relief and, in turn, the psyche of Main Street.

AKIKO FUJITA: Some good takeaways there. Liz Ann Sonders, the senior vice president and chief investment strategist at Charles Schwab, good to talk to you today.