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Portfolio > Economy & Markets

Schwab's Sonders Sees Opportunity in the 'Bear Market for Everything'

By Dinah Wisenberg Brin

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What You Need to Know

  • Schwab currently seeks quality characteristics in stocks rather than specific sectors.
  • Fed soft landing with little labor disruption, curbed inflation, lower balance sheet may be 'pie in the sky,' Sonders said.

Liz Ann Sonders, chief investment strategist for Charles Schwab, sees opportunities for investors even in “the bear market for everything,” and cited different scenarios that could spur the stock market to move in either direction.

There haven’t been many places for investors to hide in the current environment but they can find appealing companies, Sonders noted on a Schwab WashingtonWise podcast posted early Thursday.

“To some degree, we are in the aftermath of what many were calling a bull market in everything, and it wasn’t just the equity market, it was fixed income, it was housing, it was private investments,” she told podcast host and political analyst Michael Townsend. “And we’re in, kind of, the bear market in everything, but that doesn’t mean there aren’t opportunities, aren’t places to look for value.”

Schwab’s ‘Factor-Based Investing’ Approach

Rather than picking sectors, Schwab this year has taken a sector-neutral stance, emphasizing “factor-based investing” by screening companies for characteristics indicating high quality.

“You can apply factor-based analysis across all segments of the market, across all 11 sectors,” Sonders explained, according to a podcast transcript. “You can apply factor-based analysis to large-caps, to small-caps, to stocks that are housed in growth indexes, to stocks that are housed in value indexes.”

The firm expects both growth- and value-oriented “quality” characteristics to keep working at least in the near term, she said. With troubles in the broader economy and market, including companies revising their earnings outlooks downward, “you want to look for companies that are bucking that trend, that have positive earnings revisions,” Sonders said.

The rising-interest-rate, high-inflation environment tends to put downward pressure on longer-duration stocks — companies with cash flows and earnings expected well into the future — she noted. 

So Schwab emphasizes companies that generate strong cash flow in the near-term — higher dividend-paying companies that can sustain those dividends because of those shorter-term cash flows — Sonders explained. Given rising interest rates, Sonders also suggested companies with strong balance sheets marked by higher cash and lower debt levels.

Touching on the broad range of expert predictions on where the stock market will go, Sonders cited different potential scenarios that would prompt movement in either direction. She suggested that forecasters’ varying scenario analyses account for the differences, and placed herself “somewhere in the middle” of broadly divergent projections.

A more positive case for the market “would potentially rest on not only inflation starting to come down a bit more quickly than what is expected, but for that and continued slower growth,” she said.

“If we started to see a mild dent in the labor market, can the Fed see a green light sooner rather than later to not necessarily pivot to rate cuts, but to at least pause? And any hint that they might be able to pause, just take a breather, probably would be a scenario in which the market could move significantly higher,” Sonders added.

“I wouldn’t be shocked if we have a bit more downside. I don’t think we’re out of the woods yet. I’m also not on the end of the spectrum that says, ‘Nothing to see here. Everything is fine. We’re going to, you know, shoot straight up between now and year-end,’” Sonders said.

“So I think the easier call is that volatility is going to persist, and we’ll be both up and down between now and year-end,” she said.

While some well-known analysts have predicted the market could slide another 20%, many of those comments were made a couple of weeks ago, “and we’ve already had some of that downside already,” she noted, on a day that ended with significant stock losses.

‘Pie in the Sky’ Soft Landing?

As for the broader economic outlook, Sonders questioned how feasible it is for the Federal Reserve to achieve a soft landing for the economy while cutting high inflation, shrinking its own balance sheet and avoiding labor market disruption.

“I think they know what they’re trying to do. Whether they’re ultimately going to be successful in the timeframe they’d like to be successful in while not disrupting the landscape too much is yet to be seen,” she said, adding that the Fed is trying to thread a fairly narrow hole in the needle.

“I think it is somewhat pie in the sky to hope for a soft landing, not much deterioration in the labor market, while commensurately bringing down a 40-year high in inflation, at the same time shrinking a $9 trillion balance sheet,” she said.

Central bankers at the Fed and elsewhere are making monetary policy based on lagging inflation data, “and then the effects of raising interest rates, the effects of tighter monetary policy are in the future. So the combination of those lags is a pretty wide span, and a lot can happen during that span,” she added.

Dinah Wisenberg Brin

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