Stock rallies 'ripe for trimming' in bearish market: Liz Ann Sonders
Yahoo Finance Video
Charles Schwab Chief Investment Strategist Liz Ann Sonders joins Yahoo Finance Live to discuss market volatility, inflation, consumer expectations, and the outlook for stock prices.
Video Transcript
- Welcome back to Yahoo Finance Live, everyone. One contributing factor to market volatility. It came during the earnings season as investors evaluated the relationship between consumer spending and the largest retailers and household brands. Our next guest says that there is a big gap between consumers' expectations for the future and their assessment of their current situation.
Let's welcome in Liz Ann Sonders who is the Charles Schwab Chief Investment Strategist. Liz Ann, great to have you here with us this morning. First and foremost, what do you believe that the expectation is from the consumer right now, especially as we've been watching this kind of cyclical shift from goods to services as we do on an annual basis, but even more so where they're seeing value actually be delivered.
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LIZ ANN SONDERS: So I think the primary contributor to that spread between present situation and expectations, which by the way, both have been trending down, it's just the forward looking component has been coming down at a more rapid pace, is the inflation backdrop. But not just specifically the impact it's having on just the day to day expenses, real personal income being negative, wage growth being positive, but real wage growth being negative.
So I think it's the noticeable difference. As strategists or economists, we talk about nominal versus real. And I don't think the consumer lives in that world of those monikers. But I think the understanding of their purchasing power having been greatly dented by inflation is the primary contributor to that very widespread recession levels type spread,
- Liz Ann, given where inflation levels are right now, do you think corporate profit estimates are about to fall off a cliff? And what would that mean to the markets?
- I wouldn't say fall off a cliff but, depending on what measure of earnings revisions you look at, they certainly have been trending down. City's Revisions Index popped up a little bit recently but there's an IBest version that has still been trending down.
And I do think that there will be increasing pressure, not just on profits broadly, but profit margins. We've seen a very sort of healthy level of profit margins able to be maintained, although down a bit from the peak of mid last year. I think that's likely to be the more discussed hit, that is the setup for once we get to second quarter earnings season.
And if you look out, say at three to five year forward looking assumptions about earnings, those have been coming down for several months right now. So the longer term outlook is a bit more dour, even if analysts haven't made very recent adjustments to the next quarter. And I think it's the direction that matters more so than the level.
- So given that setup, do you think the new norm for the markets is simply bear market rallies?
- For now. We did with the rally that we saw last week, you saw some improvement in breadth. You did see some shorter term technical triggers suggesting that there could be legs to the rally. But the kind of significant breadth thrusts as they're called, the concept of which was actually sort of pioneered by my first boss in this business, the late great Marty Zweig, we didn't quite get that.
So for now it is more reminiscent of what we saw last week of what you tend to see in bear markets. And trading around them is certainly a possibility. I just think for shorter term, investors rallies look a little more ripe for trimming into than sell offs look ripe for adding risk in portfolios.
- We've had kind of this long era of uncertainty that's kind of bred some of these miscalculations, whether that's miscalculations on inventories from retail companies, whether that's miscalculations from the Fed on how long they should be using the word transitory or even the miscalculations that Treasury Secretary Janet Yellen had acknowledged as well. All of these things considered, where should investors lean into specific companies, the types of companies that they should be leaning into and the profiles of those companies who can best kind of calculate exactly how they would get through an entirely uncertain period like this?
- Yeah, great, great question. I think that aside from the is it a bear market rally? Is it more ripe for trimming into? That's sort of the big picture. But one of our themes pretty consistently this year, even into late last year, was that the low quality trade, so to speak, the unbelievable performance and speculative froth that was witnessed in those lower quality segments of the market, non-profitable tech, heavily shorted stocks, the meme stocks, SPACs, et cetera, even though you might get pops in some of those areas, that's largely in the rearview mirror.
So you want to have a quality wrapper around the types of stocks that you're looking at. I don't do individual stock level research. But we do a lot of work on factors. And I think the factors that have been doing well. And I think we'll continue to do well again, which have this quality wrapper around them would be areas like strong free cash flow yield, given what we're seeing in interest rates and inflation, healthy balance sheet, cash rich balance sheets, profitability.
This is not the time to go very long duration into companies that have no earnings and really have no near-term prospects for earnings, positive earnings revisions as we talked about, the dearth of them. So sometimes as it's never simple, but looking at what is lacking in the broad macro environment and in the broad market environment. And look for those companies that offer what is lacking in a broader sense.
And I think that's the best approach to take right now, more so even than a sector approach or a style level simple growth versus value. I believe in the fundamental or factors of value. And I think you want to wear a value hat. But don't limit yourself to where you look for it. Even value factors are outperforming in a sector like tech.
- Liz Ann, with the 30 seconds I have left here, as always you're on fire on Twitter this morning. I love this tweet from you highlighting just declining expectations amongst consumers for stock prices. Do you think that's a bullish or bearish signal to the market more broadly?
LIZ ANN SONDERS: It's never a perfect indicator as a contrarian move. I think sentiment is starting to set up as maybe a better contrarian indicator with this one being a component of it. But it's really just attitudinal surveys that show that kind of significant bearishness. The behavioral side, what investors are actually doing, we're not quite there yet.