WEBVTT - Charles Schwab Chief Investment Strategist Liz Ann Sonders Talks Fed Decision

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Liz Ane Thonder's joining us right now. Chief investment strategists

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<v Speaker 2>over at Charles Schwad and Lizanne. What was most surprising

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<v Speaker 2>to you what we learned from the Fed today or

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<v Speaker 2>the market's reaction to it.

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

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<v Speaker 3>this was a big surprise. We actually were of the

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<v Speaker 3>view that there was justification for the Fed pausing at

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<v Speaker 3>this month's meeting today. Now, expectations were such, you were

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<v Speaker 3>at about a ninety eight percent probability. You had the

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<v Speaker 3>Timorros article that came out suggesting the Fed was going

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<v Speaker 3>to do something, But it was I think pretty easy

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<v Speaker 3>to expect a hawkish cut given stickiness and inflation and

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<v Speaker 3>relatively resilient growth. I guess what the market reacted to

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<v Speaker 3>was the cutting in half of the number of rate

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<v Speaker 3>cuts expected in twenty twenty five, not to mention the

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<v Speaker 3>fact that you had a discent this time, and it

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<v Speaker 3>was an interesting descent because you know, it's a brand

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<v Speaker 3>new president in terms of the Cleveland Fed, So it

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<v Speaker 3>was it was an extreme move on the downside, but

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<v Speaker 3>we were already seeing a lot of churn and weakness

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<v Speaker 3>under the surface really, since the election is just masked

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<v Speaker 3>by the until today strength by the max seven.

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<v Speaker 4>Right, and just took out the legs from them, and

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<v Speaker 4>then there you go. Now you have negative breadth versus

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<v Speaker 4>positive breath. At the end of the day, Lizanne, it

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<v Speaker 4>was clear from the press or that there were some

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<v Speaker 4>FED officials who were looking at potential policy changes as

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<v Speaker 4>a way that their economy and growth and inflation forecast

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<v Speaker 4>was shaping up for next year. How then do you

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<v Speaker 4>manage your asset allocation when there is so much confusion.

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

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<v Speaker 3>but confusion around government policy. And I you know that

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<v Speaker 3>there were so many reporters that tried to flesh that

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<v Speaker 3>out from Powell, But he's in a position much like

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<v Speaker 3>the rest of us, which is, you know, the ultimate

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<v Speaker 3>shrug emoji, because particularly in in areas like immigration, like

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<v Speaker 3>tariff and the playbook that we have from twenty eighteen

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<v Speaker 3>with regard to tariffs, we just don't know when the

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<v Speaker 3>announcements are going to come, whether this truly is a negotiating.

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<v Speaker 5>Tactic, or whether they will go to the extreme.

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<v Speaker 3>It's hard to argue against the idea that tariffs all

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<v Speaker 3>else sql put downward pressure on growth, they put upward

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<v Speaker 3>pressure on inflation, and that arguably is something that came

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<v Speaker 3>into the mix in terms of summary of economic projections,

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<v Speaker 3>and the bias now much more in favor of the

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<v Speaker 3>risk of higher inflation relative to lower inflation, and that

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<v Speaker 3>was a big switch from the September dots plot and

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<v Speaker 3>summary of economic projection. So I think that was embedded

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<v Speaker 3>in the market weakness today too.

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<v Speaker 1>I love the fact that you brought up a shrug

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<v Speaker 1>emoji because Alex and I are saying there are so

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<v Speaker 1>many of His answer is pretty much amounted to that.

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<v Speaker 1>When it comes to the FEDS inflation target, he clarified

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<v Speaker 1>that it is still two percent. It's not two and

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<v Speaker 1>a half percent, it's not two is percent. What is

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<v Speaker 1>your confidence though, that that's what is going to stick

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<v Speaker 1>with given that there's so many things that are evolving

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<v Speaker 1>and will evolve in twenty twenty five.

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<v Speaker 5>You know, I don't.

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<v Speaker 3>It's hard to have competence in a metric that is

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<v Speaker 3>at least near term likely to be driven by government policy,

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<v Speaker 3>particularly tariffs. Yes, you know, I mentioned the twenty eighteen playbook.

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<v Speaker 3>The difference, of course is that in twenty eighteen. You know,

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<v Speaker 3>the pro tariff folks will say, well, it didn't lead

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<v Speaker 3>to inflation. Well, they were much more targeted, they tended

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<v Speaker 3>to be in intermediate goods, they were much shallower in

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

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<v Speaker 3>Obviously a very different situation today, Not to mention broader,

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<v Speaker 3>larger tariffs targeted on imports from multiple countries. What we

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<v Speaker 3>did see in twenty eighteen is that tariff goods did

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<v Speaker 3>see a big surge in inflation relative to non tariff goods.

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<v Speaker 3>But we just don't know what twenty twenty five's playbook

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<v Speaker 3>is going to look like.

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<v Speaker 5>But again it's hard to argue that.

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<v Speaker 3>The bias is an up at least near term and

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<v Speaker 3>inflation to calibrate policy. And to the first part of

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<v Speaker 3>your question, trying to trade from an acid allocation tactical

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

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<v Speaker 3>I think you want to sort of stay close to

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<v Speaker 3>your sort of benchmark strategic acid allocation waitings, but really

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<v Speaker 3>take advantage of volatility for maybe portfolio based rebalancing as

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<v Speaker 3>opposed to waiting for the calendar to dictate rebalancing.

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<v Speaker 2>And then that gets into the ideal Liz and as

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<v Speaker 2>the weather looking through some of these issues, meaning the

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<v Speaker 2>uncertainty around the Trump administration, the potential volatility, and obviously

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<v Speaker 2>the potential inflationary impact. I deride J. Powell for saying

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

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<v Speaker 2>But is there a case for investors to indeed look

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<v Speaker 2>past it is certainly if you're a bottom up bus

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<v Speaker 2>stock picking type of person.

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

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<v Speaker 3>tariffs and immigration that can be done via executive order,

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<v Speaker 3>so that is near term, will be some point where

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<v Speaker 3>we have more clarity and we.

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<v Speaker 5>Could start to look past that, particularly to.

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<v Speaker 3>The end of the year where you have potential to

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<v Speaker 3>start to see some more of the pro growth policies,

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<v Speaker 3>whether it's on the tax funt or the regulatory front.

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<v Speaker 3>Those require congressional approval though, so we're talking about different

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<v Speaker 3>animals here in terms of timing and in terms.

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<v Speaker 5>Of the process.

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<v Speaker 3>I think what we are likely to see is a

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<v Speaker 3>focus on fundamentals, that connectivity between fundamentals, quality based fundamentals,

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<v Speaker 3>trajectory in terms of earnings exclusive of any variability associated

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<v Speaker 3>with government policy. I think that's where the focus is

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<v Speaker 3>likely to be is where will those fundamentals be maintained

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<v Speaker 3>with that growth bias, with that profitability, strength of balance sheet,

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<v Speaker 3>interest coverage, exclusive of concerns about policy uncertainty.

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<v Speaker 4>So, lizam, where does that leave small caps in mid caps?

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<v Speaker 3>Well, I think the move up from you know, sub

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<v Speaker 3>three eight to more than three and a half on

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<v Speaker 3>the tenure today was certainly a big part of why

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<v Speaker 3>you saw the big turnaround in small caps to the downside.

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<v Speaker 5>You know, most many.

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<v Speaker 3>Smaller companies, particularly the zombie companies, there's more variable rate

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<v Speaker 3>debt and they are more at the mercy of what

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<v Speaker 3>happens on the long end of the spectrum. And I

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<v Speaker 3>think that will continue to be the case, that small

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<v Speaker 3>caps will be at the mercy of the move in

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<v Speaker 3>the bond market. And so I think you have opportunities.

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<v Speaker 3>But what we have been saying is when you go

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<v Speaker 3>down the cap spectrum looking for opportunities, do not sacrifice quality.

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<v Speaker 5>We had a low quality trade that kicked in in

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<v Speaker 5>the last month or so.

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<v Speaker 3>We were saying, fade that low quality trade down the

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<v Speaker 3>cap spectrum. If you're going to go down the cap

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<v Speaker 3>spectrum absolutely stay up in quality.

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<v Speaker 1>So, Lizanne, at the end of the day, how much

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<v Speaker 1>do you read into today's sell off in stocks and

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<v Speaker 1>bonds and doesn't set the tone for the remaining days

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<v Speaker 1>of twenty twenty four.

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<v Speaker 3>Well, there was some signs of some turn under the surface.

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<v Speaker 3>If you look at the NASDAC. Obviously the market has

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<v Speaker 3>done really well since election day, but the average member

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<v Speaker 3>maximum drawed down with then the SMP is negative nine

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<v Speaker 3>percent just in see election. It's negative twenty one percent

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<v Speaker 3>in the Nasdaq just in see election, and that doesn't

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<v Speaker 3>include today. So we were seeing some underlying weakness, it

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<v Speaker 3>was just masked by what the cap weighted indexes were doing.

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<v Speaker 3>I think that type of turn under the surface could continue.

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<v Speaker 5>We may continue to see some.

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<v Speaker 3>Catch down by their recent sort of high momentum leaders.

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<v Speaker 3>I would look for the point where you start to

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<v Speaker 3>see some grinding better performance under the surface, much like

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<v Speaker 3>we started to see back in the mid July period

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

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<v Speaker 3>on as we go through this process of weakness, even

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<v Speaker 3>if it's only a one day phenomenon.

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<v Speaker 5>I have no idea that's the case.

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<v Speaker 2>Well, that kind of circles us back to corporate earnings, Lisanne.

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<v Speaker 2>I mean you mentioned what we saw earlier this year

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<v Speaker 2>with some of the same fears of materialized, and then

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<v Speaker 2>when companies started to report, at least the larger cap companies,

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<v Speaker 2>all was well, relatively speaking, And I do wonder if

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<v Speaker 2>maybe we see a repeat of that where people do

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<v Speaker 2>rush back to some of those big tech just big

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<v Speaker 2>cap names, not just tech, but big cat names, those

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<v Speaker 2>that have proven to have the cash flow of the

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<v Speaker 2>revenue course the profitability to justify their valuations.

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

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<v Speaker 3>but profit margins. So expectations for calendar your twenty twenty

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<v Speaker 3>five earnings, both for the S and P but also

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<v Speaker 3>down the cap spectrum in an index like the rest

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<v Speaker 3>of two.

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<v Speaker 5>Thousand are relatively lofty.

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<v Speaker 3>In the case of the S and P five hundred,

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<v Speaker 3>those fairly lofty double digit kind of gains and earnings

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<v Speaker 3>are predicated on record breaking profit margins. The good news

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<v Speaker 3>is is that forward twelve month profit margin estimates continue

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<v Speaker 3>to go higher. If that is maintained and you continue

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

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<v Speaker 5>In those segments of the market where.

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

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<v Speaker 3>I think that trajectory of profitability and in particular maintenance

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<v Speaker 3>if not growth and profit margins.

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<v Speaker 5>Is really key to story in twenty twenty five.

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<v Speaker 1>All right, liz Anne, really appreciate your joining us today.

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<v Speaker 1>Fantastic insight from liz Anne Sanders, Chief Investment Strategies over

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<v Speaker 1>at Charles Schwab on the selloff