Recent economic data 'hasn’t been fully supportive of that shift to the cyclical side': Liz Ann Sonders
Charles Schwab Senior Vice President & Chief Investment Strategist Liz Ann Sonders joins Yahoo Finance’s Akiko Fujita to break the latest market action as concerns over a second wave of coronavirus rise.
Video Transcript
AKIKO FUJITA: Let's kick things off today with Liz Ann Sonders. She is a Senior Vice President and Chief Investment Strategist at Charles Schwab. And Liz, it's great to have you on on a day like this to really make sense of all the moves here. We're looking at four straight days of declines now. What do you make of the big pullback that we're seeing today?
LIZ ANN SONDERS: So I think it's a combination of factors. Clearly, what we began-- what began as what was-- many hoped would be a healthy rotation where you stimulated some profit taking in some of the prior high momentum areas of the market and a shift into more classical cyclical names. The problem is that the economic data that we've gotten of late hasn't been fully supportive of that shift to the cyclical side.
And then you pointed out the absence of any kind of fiscal relief package. If you add that to the fact that Jerome Powell made it very clear that the Fed is now basically moved the ball into the fiscal policy court, suggesting implicitly, anyway, that monetary policy has gone as far as it's going to go, given how much of a stimulant that was to not just equity prices, but asset prices across the board, I think you have what could have just been a rotation now be more of a sort of traditional correction. And you're seeing that today with kind of a rotation, at least in relative terms, away from those cyclicals back toward the relative, quote, "safety" of things like technology.
AKIKO FUJITA: So you know, I ran through a number of headlines that we got over the weekend that certainly seemed to add to the jitters in the market, one of those being just the potential for another economic shutdown in Europe. It sounds like, though, you think this was just kind of an excuse to sell off, that really this rotation was already set in motion?
LIZ ANN SONDERS: Well, the rotation had started, but we've been saying for a while now that any rotation into those classic cyclicals would actually require that the economic data persisted on the right trajectory. And I think what the resurgent number of cases in Europe with the potential for a lockdown, is telling you not to mention concerns about what happens in the United States moving into the fall. I think that that really didn't provide the kind of macro support that I think was necessary in order to maintain that rotation toward those cyclical areas like industrials, materials, energy.
And also interesting that we didn't really get the leadership tailwind behind financials. So it was hard to suggest if that was a true reflection of an improving economy without that leadership in the financials. So I think it was-- there were lots of ingredients in this recipe.
AKIKO FUJITA: Let's talk about those financials. To your point, there were a lot of investors looking to that sector in terms of the leadership there. We are seeing it down 14% on those headlines that came out from what was really a blockbuster report that came out on these major banks allegedly aiding in money laundering. How do you take those headlines? And does that make you reassess, potentially, some of the investments in the financial sector?
LIZ ANN SONDERS: So I think it does call into question maybe where earnings estimates are. There probably has to be some adjustment by analysts for the potential of losses associated with that. One of the positive underpinnings behind financials, too, was they came through the recent stress tests by the Fed with relative flying colors. But of course, this problem that's now been picked up wasn't picked up back then, so it's a little bit of a wet blanket on what had become a better fundamental story, and now has this fairly big dent in it.
AKIKO FUJITA: Yeah, does this threaten the fundamentals?
LIZ ANN SONDERS: Again, I think for those banks at risk here, or are suspect in this, I think it probably means a ratcheting down of earnings expectations. But of course, also tied into that would be any kind of rolling over in what had been a pretty nice trajectory for economic data. And if we see that we're really past that point of the most significant percentage increases off that low, I think that also puts a bit of a dent in what could have been some leadership by financials.
AKIKO FUJITA: Some of the issues that you mentioned, whether it is the concerns over in Europe, the uptick in those COVID cases, a potential of additional ramping up on these US-China tensions, I mean, these are things that have been weighing on the markets for some time. How do you think investors should be looking at those headlines in the broader context of this pullback? And what are some price levels that you are looking to?
LIZ ANN SONDERS: Well, you know, I'm not trading-oriented, so I'm not looking at any kind of short-term technical levels. But I think, you know, you mentioned US-China relations. I think that's important to think about in this pandemic environment, because we're so focused on everything pandemic related, everything virus related, whether it's trajectory of cases, whether we're going to have further lockdowns in the economy, the prospects for therapeutics, the prospects for vaccines.
But we have to remember before the pandemic, most of the major volatility that we were seeing in the stock market on a day-to-day basis, on an intraday basis, was tied to announcements, both perceived good and bad, to trade. That was a huge volatility driver prior to the pandemic. And now that's sadly being thrown into the mix again in an environment where we haven't seen any kind of waning impact of virus-related statistics. And then, of course, you add to it that this is coming in a short span of time before an election that already there was grave uncertainties about, and now you've got the Supreme Court justice uncertainty on top of that, and again, lots of ingredients.
AKIKO FUJITA: To your point on the US-China factor there, since the pandemic, though, began, it does feel like investors have largely shrugged off a lot of the headlines on the tech war that we've been seeing play out, and really focused on the trade talks themselves and whether that phase one deal remains intact. Do you think there's a bit of complacency kicking on that front? Or you think at the end of the day, that's really the only factor as it relates to this relationship that will weigh on the markets as a whole?
LIZ ANN SONDERS: I would have argued back around September 2 when you had the S&P and the NASDAQ hitting all-time highs, and you had that dominant leadership by the so-called big five that had become almost their own quartile in the S&P, that there was complacency embedded in the pricing of those indexes and some of those stocks. However, I think some of the concerns from a regulatory standpoint and, quite frankly, the fact that there's a bit of bipartisan support, and there's not much of that these days in Washington, for taking a tough stance against some of these technology companies, I think that may have been part of the background factor that drove that initial rotation out of some of those stocks.
Not including today, those big five names, if you just look at them in the aggregate, were down about 17% just through Friday's close. So we were more than just in correction territory. And I think concerns about the regulatory environment, regardless of what happens on November 3, I think, is probably what also was at play.
AKIKO FUJITA: Liz Ann Sonders, good to talk to you. She's a--
LIZ ANN SONDERS: Thank you.
AKIKO FUJITA: --Senior Vice President and Chief Investment Strategist at Charles Schwab.
