Liz Ann Sonders: Time to Move Beyond Stocks and Bonds

Ask anyone in finance about “Liz Ann” and they know who you’re referring to. She’s Liz Ann Sonders, the chief investment strategist at Charles Schwab, who has been tracking, analyzing and commenting on financial markets from that perch for almost 22 years, always with the focus of the individual investor in mind.

Sonders is regularly included in Investment Advisor’s IA25 list of the 25 most important people for the financial advisory community, and she has been named to Barron’s 100 Most Influential Women in Finance list and celebrated as Best Market Strategist by Kiplinger’s Personal Finance.

ThinkAdvisor asked her to participate in our new series in which we ask well-known personalities in the financial industry 10 questions related to financial markets, work and after-work activities.

Sonders, who is always analytical, not surprisingly answered with bullet points, clearly making the points she wanted to communicate. We converted those bullets into full sentences.

Here are our questions and her answers:

THINKADVISOR: What market indicator, industry statistic, regulatory change or advisor trend are you watching most closely right now and why?

LIZ ANN SONDERS: The correlation between bond yields and stock prices. For three decades starting late-1960s, correlation was mostly negative; for two decades since then, correlation has been mostly positive.

Renewed/persistent negative correlation could suggest a secular inflationary backdrop; renewed/persistent negative correlation would also mean diversification benefits of bonds vs. stocks would lessen since negative bond yields/stock prices correlation = positive bond returns/stock returns correlation.

How has it been changing recently (2021) and how do you expect it to change (2022)?

Correlation dipped to negative in mid-2021 during early stage of inflation spike, but rebounded back positive. If supply shocks continue to dominate (like during the 1960s-1980s) vs. demand shocks dominating (like 1990s-2010s), a longer-lasting negative bond yields/stock prices correlation could arrive in 2022.

What would you suggest advisors do now or consider doing in the future about it?

There are a few considerations for advisors. The first is a more active approach on the fixed income side of portfolios. They could also broaden diversification beyond just stocks and bonds, including international and alternatives. Taking possibly higher turnover into consideration as per taxes, et. al, advisors might also consider adjusting from calendar-based rebalancing to volatility-based rebalancing (e.g., more frequent trimming into strength/adding into weakness) to stay in gear with market and strategic allocations.

Who or what critical source of information do you track, or follow online, to keep up with this or other trends?

Rolling 120-day correlation between S&P 500 and 10-year bond yields. In addition, at this stage in the economic cycle, I keep an eye on the yield curve and inflation expectations. As with most economic data and its relationship to stock market behavior, remember that “better or worse often matters more than good or bad” (i.e., focus at least as much on rate of change and inflection points as on level).