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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Liz Ane Thonder's joining us right now. Chief investment strategists

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Speaker 2: over at Charles Schwad and Lizanne. What was most surprising

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Speaker 2: to you what we learned from the Fed today or

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Speaker 2: the market's reaction to it.

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Speaker 3: Well, the market reaction was quite stream. I don't think

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Speaker 3: this was a big surprise. We actually were of the

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Speaker 3: view that there was justification for the Fed pausing at

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Speaker 3: this month's meeting today. Now, expectations were such, you were

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Speaker 3: at about a ninety eight percent probability. You had the

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Speaker 3: Timorros article that came out suggesting the Fed was going

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Speaker 3: to do something, But it was I think pretty easy

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Speaker 3: to expect a hawkish cut given stickiness and inflation and

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Speaker 3: relatively resilient growth. I guess what the market reacted to

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Speaker 3: was the cutting in half of the number of rate

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Speaker 3: cuts expected in twenty twenty five, not to mention the

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Speaker 3: fact that you had a discent this time, and it

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Speaker 3: was an interesting descent because you know, it's a brand

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Speaker 3: new president in terms of the Cleveland Fed, So it

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Speaker 3: was it was an extreme move on the downside, but

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Speaker 3: we were already seeing a lot of churn and weakness

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Speaker 3: under the surface really, since the election is just masked

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Speaker 3: by the until today strength by the max seven.

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Speaker 4: Right, and just took out the legs from them, and

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Speaker 4: then there you go. Now you have negative breadth versus

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Speaker 4: positive breath. At the end of the day, Lizanne, it

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Speaker 4: was clear from the press or that there were some

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Speaker 4: FED officials who were looking at potential policy changes as

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Speaker 4: a way that their economy and growth and inflation forecast

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Speaker 4: was shaping up for next year. How then do you

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Speaker 4: manage your asset allocation when there is so much confusion.

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Speaker 3: Well, it's not just confusion around the path of FED policy,

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Speaker 3: but confusion around government policy. And I you know that

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Speaker 3: there were so many reporters that tried to flesh that

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Speaker 3: out from Powell, But he's in a position much like

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Speaker 3: the rest of us, which is, you know, the ultimate

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Speaker 3: shrug emoji, because particularly in in areas like immigration, like

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Speaker 3: tariff and the playbook that we have from twenty eighteen

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Speaker 3: with regard to tariffs, we just don't know when the

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Speaker 3: announcements are going to come, whether this truly is a negotiating.

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Speaker 5: Tactic, or whether they will go to the extreme.

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Speaker 3: It's hard to argue against the idea that tariffs all

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Speaker 3: else sql put downward pressure on growth, they put upward

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Speaker 3: pressure on inflation, and that arguably is something that came

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Speaker 3: into the mix in terms of summary of economic projections,

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Speaker 3: and the bias now much more in favor of the

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Speaker 3: risk of higher inflation relative to lower inflation, and that

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Speaker 3: was a big switch from the September dots plot and

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Speaker 3: summary of economic projection. So I think that was embedded

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Speaker 3: in the market weakness today too.

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Speaker 1: I love the fact that you brought up a shrug

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Speaker 1: emoji because Alex and I are saying there are so

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Speaker 1: many of His answer is pretty much amounted to that.

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Speaker 1: When it comes to the FEDS inflation target, he clarified

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Speaker 1: that it is still two percent. It's not two and

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Speaker 1: a half percent, it's not two is percent. What is

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Speaker 1: your confidence though, that that's what is going to stick

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Speaker 1: with given that there's so many things that are evolving

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Speaker 1: and will evolve in twenty twenty five.

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Speaker 5: You know, I don't.

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Speaker 3: It's hard to have competence in a metric that is

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Speaker 3: at least near term likely to be driven by government policy,

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Speaker 3: particularly tariffs. Yes, you know, I mentioned the twenty eighteen playbook.

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Speaker 3: The difference, of course is that in twenty eighteen. You know,

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Speaker 3: the pro tariff folks will say, well, it didn't lead

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Speaker 3: to inflation. Well, they were much more targeted, they tended

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Speaker 3: to be in intermediate goods, they were much shallower in

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Speaker 3: terms of percent, and we didn't otherwise have an inflationary backdrop.

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Speaker 3: Obviously a very different situation today, Not to mention broader,

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Speaker 3: larger tariffs targeted on imports from multiple countries. What we

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Speaker 3: did see in twenty eighteen is that tariff goods did

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Speaker 3: see a big surge in inflation relative to non tariff goods.

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Speaker 3: But we just don't know what twenty twenty five's playbook

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Speaker 3: is going to look like.

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Speaker 5: But again it's hard to argue that.

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Speaker 3: The bias is an up at least near term and

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Speaker 3: inflation to calibrate policy. And to the first part of

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Speaker 3: your question, trying to trade from an acid allocation tactical

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Speaker 3: or otherwise around that, I think it's a really tricky exercise.

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Speaker 3: I think you want to sort of stay close to

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Speaker 3: your sort of benchmark strategic acid allocation waitings, but really

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Speaker 3: take advantage of volatility for maybe portfolio based rebalancing as

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Speaker 3: opposed to waiting for the calendar to dictate rebalancing.

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Speaker 2: And then that gets into the ideal Liz and as

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Speaker 2: the weather looking through some of these issues, meaning the

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Speaker 2: uncertainty around the Trump administration, the potential volatility, and obviously

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Speaker 2: the potential inflationary impact. I deride J. Powell for saying

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Speaker 2: he's looking past it. Maybe that's what he has to say,

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Speaker 2: But is there a case for investors to indeed look

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Speaker 2: past it is certainly if you're a bottom up bus

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Speaker 2: stock picking type of person.

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Speaker 3: Well, again, there's the timing issues. So with regard to

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Speaker 3: tariffs and immigration that can be done via executive order,

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Speaker 3: so that is near term, will be some point where

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Speaker 3: we have more clarity and we.

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Speaker 5: Could start to look past that, particularly to.

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Speaker 3: The end of the year where you have potential to

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Speaker 3: start to see some more of the pro growth policies,

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Speaker 3: whether it's on the tax funt or the regulatory front.

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Speaker 3: Those require congressional approval though, so we're talking about different

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Speaker 3: animals here in terms of timing and in terms.

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Speaker 5: Of the process.

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Speaker 3: I think what we are likely to see is a

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Speaker 3: focus on fundamentals, that connectivity between fundamentals, quality based fundamentals,

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Speaker 3: trajectory in terms of earnings exclusive of any variability associated

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Speaker 3: with government policy. I think that's where the focus is

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Speaker 3: likely to be is where will those fundamentals be maintained

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Speaker 3: with that growth bias, with that profitability, strength of balance sheet,

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Speaker 3: interest coverage, exclusive of concerns about policy uncertainty.

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Speaker 4: So, lizam, where does that leave small caps in mid caps?

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Speaker 3: Well, I think the move up from you know, sub

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Speaker 3: three eight to more than three and a half on

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Speaker 3: the tenure today was certainly a big part of why

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Speaker 3: you saw the big turnaround in small caps to the downside.

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Speaker 5: You know, most many.

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Speaker 3: Smaller companies, particularly the zombie companies, there's more variable rate

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Speaker 3: debt and they are more at the mercy of what

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Speaker 3: happens on the long end of the spectrum. And I

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Speaker 3: think that will continue to be the case, that small

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Speaker 3: caps will be at the mercy of the move in

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Speaker 3: the bond market. And so I think you have opportunities.

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Speaker 3: But what we have been saying is when you go

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Speaker 3: down the cap spectrum looking for opportunities, do not sacrifice quality.

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Speaker 5: We had a low quality trade that kicked in in

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Speaker 5: the last month or so.

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Speaker 3: We were saying, fade that low quality trade down the

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Speaker 3: cap spectrum. If you're going to go down the cap

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Speaker 3: spectrum absolutely stay up in quality.

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Speaker 1: So, Lizanne, at the end of the day, how much

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Speaker 1: do you read into today's sell off in stocks and

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Speaker 1: bonds and doesn't set the tone for the remaining days

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Speaker 1: of twenty twenty four.

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Speaker 3: Well, there was some signs of some turn under the surface.

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Speaker 3: If you look at the NASDAC. Obviously the market has

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Speaker 3: done really well since election day, but the average member

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Speaker 3: maximum drawed down with then the SMP is negative nine

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Speaker 3: percent just in see election. It's negative twenty one percent

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Speaker 3: in the Nasdaq just in see election, and that doesn't

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Speaker 3: include today. So we were seeing some underlying weakness, it

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Speaker 3: was just masked by what the cap weighted indexes were doing.

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Speaker 3: I think that type of turn under the surface could continue.

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Speaker 5: We may continue to see some.

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Speaker 3: Catch down by their recent sort of high momentum leaders.

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Speaker 3: I would look for the point where you start to

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Speaker 3: see some grinding better performance under the surface, much like

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Speaker 3: we started to see back in the mid July period

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Speaker 3: of time. So that's what I'm keeping a close eye

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Speaker 3: on as we go through this process of weakness, even

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Speaker 3: if it's only a one day phenomenon.

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Speaker 5: I have no idea that's the case.

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Speaker 2: Well, that kind of circles us back to corporate earnings, Lisanne.

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Speaker 2: I mean you mentioned what we saw earlier this year

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Speaker 2: with some of the same fears of materialized, and then

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Speaker 2: when companies started to report, at least the larger cap companies,

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Speaker 2: all was well, relatively speaking, And I do wonder if

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Speaker 2: maybe we see a repeat of that where people do

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Speaker 2: rush back to some of those big tech just big

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Speaker 2: cap names, not just tech, but big cat names, those

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Speaker 2: that have proven to have the cash flow of the

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Speaker 2: revenue course the profitability to justify their valuations.

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Speaker 3: I think you're right, Romain, and it's not just profitability

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Speaker 3: but profit margins. So expectations for calendar your twenty twenty

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Speaker 3: five earnings, both for the S and P but also

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Speaker 3: down the cap spectrum in an index like the rest

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Speaker 3: of two.

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Speaker 5: Thousand are relatively lofty.

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Speaker 3: In the case of the S and P five hundred,

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Speaker 3: those fairly lofty double digit kind of gains and earnings

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Speaker 3: are predicated on record breaking profit margins. The good news

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Speaker 3: is is that forward twelve month profit margin estimates continue

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Speaker 3: to go higher. If that is maintained and you continue

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Speaker 3: to see decent productivity numbers, then I think you're okay.

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Speaker 5: In those segments of the market where.

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Speaker 3: You've got that profitability profile. But I think you're right.

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Speaker 3: I think that trajectory of profitability and in particular maintenance

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Speaker 3: if not growth and profit margins.

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Speaker 5: Is really key to story in twenty twenty five.

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Speaker 1: All right, liz Anne, really appreciate your joining us today.

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Speaker 1: Fantastic insight from liz Anne Sanders, Chief Investment Strategies over

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Speaker 1: at Charles Schwab on the selloff