Powell's pessimism about recovery is a 'recipe for profit taking:' Liz Ann Sonders

Stocks are plunging with the Dow tumbling over 1,000 points amid renewed concerns over a second coroanvirus wave. Charles Schwab Chief Investment Strategist Liz Ann Sonders joins Heidi Chung to discuss.

Video Transcript

HEIDI CHUNG: The US economy, though, entered a recession at the end of February, and today, we learned that another 1.54 million Americans filed for unemployment benefits last week. And just over the past three months, more than 44 million Americans have filed jobless claims.

Now, to make sense of the recent economic data and market moves, we are joined now by Liz Ann Sonders, Charles Schwab's chief investment strategist. Liz, thank you so-- Liz Ann, thank you so much for joining us today. I want to start here, though. I noticed your tweet from earlier this morning. And in it you say, quote, "Words for today, reality check." Can you break down what you mean there?

LIZ ANN SONDERS: Sure. Well, I think it's a number of factors, and it's not just the obvious ones associated with the virus. I think the second wave that we're starting to see in a number of states, particularly those concentrated in the south, have brought some jitters into the market. But there was just so much speculative froth that was starting to build in the markets, particularly among really small traders.

You saw it in the options market. You saw it in the bankruptcy stocks, and I think rightly so was getting a lot of media attention. So I think the combination of those factors and some thinking that Jerome Powell sounded a little shaky yesterday-- he certainly wasn't reinforcing the "recovery is around the corner, nothing to worry about here." So I think it was just a recipe for some serious profit taking here, especially given where you're seeing the weakness concentrated.

HEIDI CHUNG: Liz Ann, speaking of those concentrations of weakness, small caps were showing some signs of life but have started to roll over again, falling a bit and underperforming. I just want to get your thoughts on if we should be concerned about that. Is that going to be a signal that perhaps the economic recovery is not exactly gaining enough steam here?

LIZ ANN SONDERS: I don't necessarily think that's the case. When you look inside at the small cap rally that we've seen over the last month or so, there was an extremely low quality bias to it. If you look at the difference between the zombie companies-- so companies that don't earn enough to pay interest on debt-- those were handily outperforming the Russell 2000 overall, handily outperforming the non-zombies within the Russell 2000. It was the opposite for the S&P 500. The higher quality non-zombie companies were outperforming.

So I don't think the rally in small caps was necessarily sending a positive economic sign. I think it was reflective of the kind of speculation we were seeing going back to what I said before, which is focus on bankruptcy stocks. And you saw it in the zombie stocks.

So I don't in turn necessarily think that emerging underperformance again of small caps is sending a particularly-- I mean, I think the economic outlook is not good, but I wouldn't suggest that small caps having outperformed was sending a positive economic outlook. I think it was a sign of speculation.

HEIDI CHUNG: And to that point, Liz Ann, then, do you think that the recession that we are currently in-- a lot of consensus among economists out there saying that it's going to be deep, but it's likely going to be quick and we're going to be able to emerge from it rather quickly. Do you agree with that sentiment?

LIZ ANN SONDERS: Well, so keep in mind that the NBER, which is the arbiter of recessions, when they, as we learned this week-- and we should know this by just looking at history. When they decide we're in a recession and they go back to date the start of it, they go back to the peak in economic activity. In turn, when they ultimately believe that the recession is ending or over, they go back to the trough in economic activity. So based on how they defined the end, which will still be way down the road, it might be relatively short-lived. I just think that recovery is going to be a very, very long period of time.

What I don't think is getting enough attention are second-order economic effects, regardless of whether we have any kind of major second wave in the virus. When you just think of the ripple effects of the carnage that we are seeing, how likely it is that many restaurants can stay in business at even 75% capacity, and you just think of the tentacles into other parts of the economy, I think that's been the story that's not been sufficiently told.

HEIDI CHUNG: Liz Ann, those concerns about a potential second wave of coronavirus cases certainly is weighing on the market, as we can see today. But I'm curious to get your thoughts on the commentary that we got from Treasury Secretary Steve Mnuchin in an interview with CNBC earlier today, saying that a second closing of the economy is not an option right now. So if we do see a second wave of virus, if the virus breaks out and the government doesn't want to shut down the economy, what's going to happen to the market in that situation?

LIZ ANN SONDERS: Well, you know, the government may opt not to shut down the economy, but that doesn't prevent business owners, consumers from making decisions on their own as to how to try to protect themselves. So I agree, and I think there's enough known about, at this stage, how to not combat the virus.

We don't have a treatment or vaccine. But we understand more about it certainly than we did back in February or early March. So we weren't anticipating that there would be a wholesale shutdown again. But if we have a meaningful second wave, I think there will absolutely be a hit to the economy, even if it's not based on a mandate-- government mandate to shut things down. I think it will be seen in the behavior of businesses and consumers.

HEIDI CHUNG: And finally, Liz Ann, if you're an investor and you are bearish on the market-- and you were saying this is something that we should have expected just given how overbought the market was looking-- in terms of pullbacks, right, is this the start of something more meaningful here, or do you think the market is going to be able to bounce back within the next couple of weeks?

LIZ ANN SONDERS: You know, it would be-- I have no greater ability to time the market in the short term than anybody else, so I don't have a definitive answer for that, other than saying that I would be surprised if we just had one day of weakness and then we whistled back to work tomorrow. I think to just ease some of this speculative excess, some of what we've seen in the sediment data probably takes more than this today, not to mention additional information on everything we have spoken about.

So it would be pretty natural to get something in the 5% to 10% range. But if the data comes in and it continues to be significantly worse, then, you know, whether or not we retest March 23, I don't know. But I think we have some work to do to ease some of this speculative fervor that has really sort of hit a fever pitch.

HEIDI CHUNG: All right. Liz Ann Sonders, Charles Schwab chief investment strategist, thank you so much for joining us today.

LIZ ANN SONDERS: My pleasure. Thank you.