Liz Ann Sonders, Charles Schwab & Co.’s chief investment strategist, warned as early as January that, amid unbridled market optimism, the economy would take a hit from coronavirus in the short term — but she didn’t envision the disease to be “the mother of all negative catalysts,” as she tells ThinkAdvisor in an interview.
Now she forecasts the recovery in a “Y” shape, rising on the stem; at present, employing the stem diagram, the U.S. economy is plunging “straight down,” she says.
In the interview, the senior vice president, who joined Schwab two decades ago, examines what it will take for the economy to be fully open for business again, discusses the corporate debt crisis and cautions of pandemic “second-order effects.” She then describes “the new version” of the world post-pandemic.
As for 2020 corporate earnings, analysts are lowering their estimates almost daily, she reports. However, at another point, she notes a “bright spot” in access to liquidity created by the Federal Reserve.
She also reveals the top question clients are asking in Schwab’s virtual webinars and names the only market sector that she favors.
The Fordham University M.B.A., who served on George W. Bush’s President’s Advisory Panel on Federal Tax Reform, has been named multiple times, including in 2020, to Investment Advisor’s IA25 list of top industry leaders and is also on Barron’s list of the 100 Most Influential Women in Finance.
ThinkAdvisor interviewed Sonders on May 13. She was speaking by phone from her base in Naples, Florida, a city of affluent individuals that will become a larger Schwab location by year’s end, she says.
Here are highlights:
THINKADVISOR: What’s your forecast for the recovery?
LIZ ANN SONDERS: I see a capital Y-shaped recovery. Before the pandemic, there was a perception that the economy was in great shape, but manufacturing and business investment were already in recession. So an important portion of the economy was heading down. Now we’re in the stem of the Y — and going straight down. Once we rebound, we’ll [move up] the stem, but probably at a much slower pace of growth.
What could trip things up?
If there’s an increase in the coronavirus as the states open and the economy is shut down again — though I don’t think that’s the expectation — there [could be] second-order economic effects: bankruptcies and defaults picking up. Companies could say to workers they laid off on a temporary basis, “You’re laid off permanently.” [In any case], there’s going to be as much of a solvency issue as a liquidity issue — bankruptcies will [increase].
You started writing about and discussing coronavirus fairly early — the end of January — forecasting that it would bring a hit to the economy in the short term. So COVID-19 was on your radar screen even then, correct?
Coronavirus was on my radar screen as a potential negative catalyst. But what was mostly on my radar was too much optimism — investors thinking that nothing could go wrong. That’s often an accident waiting to happen, but it typically needs some trigger. “This coronavirus could be just such a catalyst,” I said. I didn’t realize it was going to be the, sort of, mother of all negative catalysts.
What do you make of the market decline yesterday and today? [The week would end with the S&P down 2.3%, the worst weekly drop since late March].
Having retraced more than 60% of the market rally — up 32% in a month from the March lows — in a very short period of time, you could argue that the market was pricing in too rosy an outlook. I think we’re digesting some of that. The market looked a bit toppy both technically and sentiment-wise, and that’s a recipe for some consolidation.
What characterized it as toppy?
You were starting to see a bit of frothiness in investor sentiment — a lot of speculative chasing of certain stocks that caused it to become even narrower than it had been — the top five stocks representing about 21% of the S&P as perceived winners — that’s where all the momentum had been.
What’s your outlook for corporate earnings?
Every single day we’re continuing to see analysts ratcheting down their earnings estimates — and almost every day they drop about a dollar. We [collectively] don’t get much color [information] from companies because so many of them have withdrawn guidance, which means you can’t do any kind of accurate evaluation.
Do you have any sense, though, of what earnings will be?
If you add up all the number-crunching on individual companies that analysts are doing, it’s $127 [per share] for 2020 S&P earnings. But the top-down estimates from strategists and economists have been as low as $70. That’s Goldman Sachs’ worst-case scenario. [In January 2020, the estimate was $177.77 for S&P companies, according to FactSet.]
If analysts don’t have clarity, how are they coming up with any numbers at all?
They’re kind of flying blind; they’re guessing. They’re probably using their erasers more than their pencils. They just keep ratcheting the number down, down, down.
Are there any sectors that you like?
Among the 11 sectors, we have only one Outperformer: health care. It was an Outperformer pre-dating the pandemic; so it wasn’t something we changed to coming into it. But it’s our one Outperformer now.
The states are now opening up, and that does pose the risk of triggering a second wave of coronavirus. Any further thoughts about this?
We have to be careful, but we can’t keep economies shut down in perpetuity. Poverty kills more people than just about anything else, including a virus, Stanley Druckenmiller [manager, Duquesne Family Office] said yesterday in a webinar.
How, then, will the economy “get back to business”?
There’ll have to be a weighing of information, more testing and, hopefully, therapeutics and vaccines. It’s legitimate to think about tradeoffs. There’ll be the ability to be a little more fine-tuned with how we go about this. Two months ago the only answer was shutting down everything until we learned more. Now every day that goes by we learn more.
How urgent is the need for another stimulus bill? The House just passed the Heroes Act relief package, but the Senate is expected to reject it.
The Fed has done a number of things, including creating a suite of new programs and facilities. On the lending side, these facilities, in many cases, are still there as backstops. They’re in the background in the event that things get so bad companies are unable to access the liquidity they need through traditional channels. That many of these facilities haven’t been tapped is one of the few bright spots in this whole story. If we started to see a greater utilization of these, it would be a bigger problem.
What are your thoughts about the ballooning federal deficit? It’s been big a concern of yours.
The number one question I’ve been getting from clients at the virtual webcasts we’ve been having is on the theme of the deficit and debt, and what the Fed has been doing regarding inflation. They want to know: How do we get out of this debt hole that we’re going into even more deeply?
What’s your answer?
The Fed’s [increasing the money supply aka “printing money”] causes inflation only if the money that’s pumped into the financial system comes out via lending channels into the hands of borrowers who spend or invest it. But there’s no demand for borrowing. Deleveraging on the part of households will continue, and savings rates will probably go even higher coming out of this crisis [than after the 2008-2009 crisis]. But corporations are going to be the next cohort [so to speak] that has to seriously deleverage because they’re the ones in the midst of a crisis right now.
So you’re not concerned about inflation at the moment?
In the near-to-medium term, there’s more of a deflation problem. My answer to the clients that ask about inflation is: “We don’t have inflation to worry about right now, though there is a very strong relationship between the level of debt and the economy’s ability to grow at anything resembling a healthy pace.”
We just exited the longest economic expansion in history, but it was also the weakest by far — I mean, by far. I think a big part of the reason was the high and ever-rising burden of government debt. I’ve been calling it a simmering crisis. Government debt has a huge impact on economic growth.
What major changes do you expect to see in the economy post-pandemic?
Our economy has been close to 70% driven by consumer spending. In the new version of how our world is going to look, that will shift down. Hopefully, taking its place will be investment: private sector, capex [big corporate investment projects], health care investment, infrastructure investment. But it will take a while for those to happen, and there will be a heck of a lot of economic displacement as we go through that transition.
What are the changes that consumers will feel more directly?
The genie is out of the bottle with regard to remote working — not that every company will have every employee working remotely, but this is a really powerful force for the future. And there are so many ripple effects that need to be considered.
[The impact to] corporate real estate in certain parts of the country. In New York City, for instance, will companies need to have as much office space [as they do traditionally]? Also, working remotely, people don’t need to live in expensive metropolitan areas: From a lifestyle perspective, they might be free to live wherever they wish.
What other changes do you predict?
Probably less leisure travel that requires getting on an airplane or booking a cruise. So there’ll be more local entertainment. Another huge ripple effect: The sports industry has been so important, but how long will it take for people to be willing to crowd into a sports stadium, especially an indoor one?
What are some of the big pluses that you see occurring in this new world?
We’re speeding up the process of what we do digitally. For instance, older people who had never heard of Google Meet or Zoom are now communicating with their friends that way. And telemedicine has become a huge trend. So there’s a greater adoption to living digitally — and that’s a game changer.
Do you foresee the country’s supply chain shifting as a result of the pandemic?
Yes. That’s been an issue but has now been brought even further to the fore, particularly with regard to health-related products, even those that aren’t impacted by the virus. For example, more than 90% of all antibiotics used in the U.S. medical system come from China. So supply [sourcing] will change, not necessarily everything coming back to domestic shores but at least closer to home and more diversified.
Do you think it’s appropriate to encourage consumers to invest using robo-advisors during this financially difficult time?
I don’t want to make a blanket statement that robo advice — using that generic term — is good for everybody. The benefits are that typically it’s disciplined and diversified across asset classes. Diversification tends to provide some cushion when you go through uglier periods. There’s usually an automatic rebalancer, which forces investors to be adding when the market or asset classes go low. When investors try to [invest] on their own, they’re more prone to letting emotions kick in.
All that is in favor of digital advice. But where does the investor’s human side come in?
It doesn’t matter how digitalized things get — the forces of fear and greed will persist forever in the world of investing.
Kathy Jones is Schwab’s chief of fixed income strategies, but would you briefly discuss what’s ahead for the bond market?
Recently [the group has been] putting more emphasis on TIPS for people who are concerned about inflation longer term. We think that though there’s very little risk of inflation in the near term, one of the longer term potential drivers of higher inflation is de-globalization.
In the last 30 years, globalization has been a big force bringing down and keeping down inflation. So you have to think that de-globalization might eventually put some [upward] pressure on inflation. If we want to take back control, whether it’s because of nationalism or protectionism or just the obvious need to diversify supply chains and bring things closer to local shares, that potentially could bring some inflation in the longer term.
Schwab’s acquisition of TD Ameritrade is expected to close later this year. In February, the firm said it bought Wasmer, Schroeder & Co., a leader in fixed income separately managed accounts with AUM of $10.5 billion. What else can you tell us about this RIA?
We started the Wasmer, Schroeder acquisition before the TD acquisition but delayed movement and announcement because the TD [buy] happened. Then we went back and bought Wasmer, which is pure fixed income.
When is the deal’s anticipated closing?
In a month or two. The firm is [primarily] in Naples, Florida. With the employees they have in Naples, combined with TD employees based in Naples, plus our [Schwab] Naples branches, I think we’re going to have more employees in Naples than in Boston!
You’re personally already based in Naples, right?
Yes. We’ve had a house here for 11 years; and this year we became official residents. So I’m in quarantine mode in Naples — which is not a bad place to be.
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