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May 19, 2020 at 03:29 PM
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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?
