Schwab's Sonders: Social-Media Driven Investors Need to Wise Up

What You Need to Know

At least some of the new, young investors are momentum-driven and prone to speculation.
Advisors must incorporate this new demographic into how they think about the markets.
Investors are going to be best-served if they have a value mindset, Liz Ann Sonders says.

The financial services industry finally seems to be attracting droves of young investors, but now the challenge for advisors is to help educate them, according to Liz Ann Sonders, chief investment strategist at Charles Schwab.

Sonders and many others had wondered if the industry was “ever going to entice younger people into the market, into investing, especially given the pains endured during the financial crisis” of 2007-2008, she said Tuesday during the online Hedgeye Investing Summit presentation “Scarring & Euphoria: U.S. Economy Enters ‘Creative Destruction’ Phase.”

The challenge now is to “transition that cohort from being in some cases momentum-driven, speculators without a lot of sort of fundamental underpinnings into more educated, longer-term investors without a calamity having to happen in the interim,” she said during an interview with Keith McCullough, CEO and founder of Hedgeye.

Her comments came only a few days after Peter Crawford, Schwab’s chief financial officer, said the company saw a significant rise in new brokerage accounts in February — driven largely by a huge increase in trading influenced by social media.

The market took an unexpected turn last month, when “flash mobs started to move into more speculative, less quality-driven segments of the market,” including “heavily shorted stocks or non-profitable tech companies,” penny stocks and special purpose acquisition companies (SPACs), Sonders noted Tuesday.

Moving the stocks — of which GameStop was the “poster child” — were not just the hedge funds that were shorting the stocks but those “flash mobs of newly minted retail traders that have become an unbelievable force to be reckoned with,” she said.

“They’re being fueled by social media … and have gotten burned in many ways,” she pointed out. “But there’s no question that we have to incorporate that new cohort in the way we think about markets,” she said, noting the hedge funds have already been “forced to do that.”

Value vs. Growth

“I think this will be a value-driven market,” Sonders also said Tuesday. “I think investors will be best-served by having a bit of a value mindset.”

But she explained: “That doesn’t necessarily mean put blinders on, look at a value index and say ‘ok, I need to be in whatever the dominant segments are.’”

After all, an investor who did that over the past year may have just bought the kinds of stocks that were traditionally viewed as “value” stocks, including the utilities and telecom stocks, in indexes that did not perform well, she explained. Lower-value growth companies were where the value actually was, she noted.

Since November, meanwhile, we’ve seen “growth and inflation accelerating at the same time,” according to McCullough, who predicted more of the same. There is no data indicating that isn’t happening, he said.

‘Condensed’ Bear Market

“The condensed nature of the bear market” that started amid the pandemic last year was “driven by several factors” that included, most obviously, “double-barrel stimulus coming out of” the U.S. Federal Reserve and Congress, which was the biggest difference between how the COVID crisis was handled compared to the financial crisis of 2007-2008, she said.

But what a lot of people don’t remember is that the timing of the market reaching the bottom March 23, 2020, and then surging dramatically was driven by two factors, she explained.

First was the Fed announcing “some of the backstop lending facilities even before they were set up,” she said.

Less discussed, however, was the fact that that was the last week of the quarter, when many funds, especially mutual funds, do their rebalancing, she said.

“There was a rebalancing trigger that also went quickly into the equity side of the equation,” she said.

There were several phases to the recovery after that, including a period during which the big five FAANG tech stocks (Facebook, Amazon, Apple, Netflix and Google) dominated the market “at the expense of pretty much everything else,” she said, noting that lasted until early September.

They became a version of what we call “defensive” stock investments because we were living in a world where technology-driven remote work became the norm, she pointed out.

There was a broadening out into other stock market sectors after that that started with positive news about the coming Pfizer COVID-19 vaccine, she noted. This year we started to see more of what concerned her since August — increased interest in more “speculative” stock market investments.