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'What we've seen in the economy is unlike anything we have ever seen': Strategist

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Liz Ann Sonders, Charles Schwab Chief Investment Strategist, joined Yahoo Finance's Myles Udland, Seana Smith, Dan Roberts, and Melody Hahm to discuss her outlook for the U.S. economy.

Video Transcript

MYLES UDLAND: We're joined now by Liz Ann Sonders. She is the chief investment strategist at Charles Schwab. And Liz Ann, let's just start with maybe the most common kind of question or concern, complaint maybe, investors have about the market going up this quickly. And I think as you know, there's no historical parallel, and it's kind of left, you know, everyone-- investors, strategists, commentators-- feeling a little bit, I don't know, out at sea in some sense.

LIZ ANN SONDERS: Well, you're right, Myles, that there is no historic parallel. But there are some general trends that tend to happen when you experience the combination of a bear market and a recession. And with the exception really of just 2001, market tops have preceded starts of recessions, and market bottoms have preceded ends of recessions. So to see the market move ahead of the turn in the economic fundamentals is not inconsistent with history.

Now, there is myriad other factors around the nature of this crisis, particularly the speed and magnitude, that makes historical comparisons somewhat irrelevant. But you could argue, at the lows, down 35% in the case of the S&P, that that was discounting a pretty dire scenario. It, therefore, begs the question, given that we've retraced about 70% of the rally, whether what the market has priced in now is a rosier scenario than we're likely to see. But the market moving in advance of the turn in the fundamentals is somewhat normal.

MYLES UDLAND: Now, what is unique this time is the weighting that we're seeing in the S&P. And you know, if you look at, you know, infotech, communications services, health care-- XLV, C, and K I guess would be the letters there-- that weighting is at historical extremes. And that's certainly been a part of what has dragged the broader market higher.

I mean, is-- I don't know if concerning is the right question there, but what does it say to you when you've got three sectors, you know, accounting for-- what is it? Almost half-- more than half of the entire S&P's market cap?

LIZ ANN SONDERS: I was a bit more worried about it. And really, that represented the only success and leadership in the market. But it has broadened out to more traditional, cyclical sectors more recently. You've seen the boost in industrials and materials. So that's ostensibly a sign that the market is betting on at least a marginal better-- marginally better economic outlook than I think was priced in at the extreme lows. And then more recently, we've gotten a lift in the financials. That was sort of a necessary condition to suggest that the market and the economy had some connection.

The problem now is that if we continue to see it broaden out, we continue to see a lift in financials, you know, value hasn't been under, if that persists, that tends to be a market telling you that growth is going to be stronger than expected. That's when value tends to shine.

I hope that that's the case. That would be great news for all of us, as economic actors and participants. But I think it also establishes a potential vulnerability if this move into financials as a sign that, you know, all is clear in the economy proves to be too rosy. So I think it does represent a risk.

SEANA SMITH: Liz Ann, you had an interesting tweet that you sent out this morning, and you were-- it was a chart that was talking about the fact that the concerns over the financial markets, that they have subsided a bit, given the current rally, but still consumers remain worried about welfare and also about unemployment. So what does this tell you just about the peace of the economic recovery and whether or not the levels that we're seeing today reflected in the market-- and that maybe we got a little bit too ahead of ourselves?

LIZ ANN SONDERS: Well, it does-- it is consistent with sort of this perceived disconnect between the message the market is sending and the message the economy is sending. And although I already mentioned the historical nature of the market to move ahead of the economic fundamentals, what we've seen in the economy is unlike anything we have ever seen, other than the Great Depression, which was obviously a longer span of time. So I understand the disconnect.

I think a lot of it is also the fact that what I think has been a big driver of the market's gains here, particularly in the early stages off the March 23 low, of course, is the various programs and provision of liquidity by the Federal Reserve. And that narrative of Fed is providing stimulus or liquidity in whatever form it takes, you can even look at last fall when they stepped in to buy T-bills in order to stabilize repo market, that narrative of central banks are easing-- again, in whatever form that takes, that's good for risk assets.

And I think that has been the factor that has helped the market, but I think Main Street doesn't necessarily get the benefit from that. So yet again, we are seeing not a lot of activity or inflation-- lower case I-- in the real economy, but we're seeing it in droves in the-- in asset prices. And it is a frustrating environment for Main Street investors that maybe can't grasp that link as much as those of us that live and breathe markets every day.

MYLES UDLAND: And Liz Ann, just thinking maybe about the progression of the virus over the summer-- I mean, none of us knows what's going to happen. We're certainly hopeful that recent trends hold in place. But as we move maybe into the fall and towards this timeline that experts have tabbed as a potential second wave moment, do you think the market is likely to get a lot more sensitive than it's been to new developments on, you know, certain hotspots and especially I would guess, right? Hotspots in a major city that could lead to a kind of a broader shutdown, rather than just maybe a couple of isolated rural locations like, say, a meat factory or something like that.

LIZ ANN SONDERS: I think the sensitivity to anything virus related will persist. We've seen it mostly on the upside as it relates to therapeutics and vaccines as a trigger for some of our stronger days and weeks. And in turn, I think to the extent we get bad news, I think that's likely to be a factor as well. What I don't think is getting as much attention is not second wave of the virus, which is clearly a risk about which none of us have clarity because even the epidemiologists don't quite know what percentage risk that represents, but second order economic effects, even absent a second wave in the virus, absent the need to fully shut down the economy again.

There are ripple effects, particularly given the amount of unemployment we're looking at, that feed into consumer confidence, desire to, you know, boost savings rates, whether many of the leading indicators of bankruptcies increasing are accurate, and that starts to lead to some of these temporary layoffs becoming potentially permanent job losses. So I think it's the pattern of second order economic effects, which, again, we're in uncharted territory because we've never seen a global lockdown of an economy. So we can't use history as a guide for the likelihood that we sort of pop out of this without longer term scars. So I think there's that sort of two second type risks here-- second order economic effects and then, of course, second wave of the virus.

LIZ ANN SONDERS: Liz Ann, when we talk about the fact that we are up so significantly from the March lows, up over 30%, a lot of that is tied back to the health that we've gotten on fiscal side and then also the monetary side. There's talk of another stimulus package, and now the broader consensus is that we will get something. But I'm curious, just from your perspective, what do investors want to see included in this next package, and just how critical is it for the market in order for the market to keep up its recent momentum?

LIZ ANN SONDERS: There's probably several things. First of all, I don't think the market expects much more from the Fed, other than what they might provide in sort of verbal guidance. Because many of the newer programs that they've put together haven't even been tapped yet, and that's good news because they were put there as backstops to the extent that whether it's small businesses, large businesses didn't find themselves having access to the typical channels through which they got credit. So the fact that those haven't been tapped I think is a good thing.

So I think what the market will look for is more on the fiscal side. And I think it's combination of aid to state and local government so we don't see that sort of part of this economic story topple over, potentially more payments made to individuals, ideally evening up the deadline associated with PPP and the extension of unemployment or the end to unemployment because right now, they're off by a month. So at least aligning them so there aren't those dislocations, possibly extending them so that the bridge-- the cushion lasts, you know, as long as the economic dislocations last. So there's going to be differences, left versus right, in terms of where the priorities are, but I do expect to see ultimately both sides come together and come up with a package that probably serves purposes on both sides of the aisle.

MYLES UDLAND: All right, Liz Ann Sonders, chief investment strategist at Charles Schwab. Always great to get your thoughts. Thanks so much for joining us today.

LIZ ANN SONDERS: Thank you. My pleasure.