Schwab's Liz Ann Sonders on why calling economic recovery a V is 'premature'

Liz Ann Sonders, Chief Market Strategist at Charles Schwab, joins The Final Round to discuss her new mid-year outlook report on what is next for the U.S. economy.

Video Transcript

MYLES UDLAND: Let's take a look at the market quickly. We've got markets, again, continuing to grind higher here. The Dow is up about one half of 1%. All four major averages-- we'll make the Russell a major for today-- remain higher in today's session after we opened sharply lower, or at least futures were lower overnight and through today's market open.

We are joined now by Liz Ann Sonders. She is the Chief Investment Strategist over at Charles Schwab. And Liz Ann, let's-- let's kind of start maybe with what you've heard, and seen, and maybe talked about with some folks on this retail involvement in the market in certain sectors, areas. People are very excited about this thesis. What do you make of the idea that retail now is a big part of the market and that what-- you know, what I guess traders would call "chatter" is now something invest-- you know, institutions need to be paying attention to?

LIZ ANN SONDERS: Look, it's real as measured by things like number of accounts opened and the amount of trading that is being done. I'm not sure we can automatically tie that to why the market has done as well as it has. I think there are follow-ons that happen, whether it's with risk parity funds or other sort of high-frequency traders, that may sort of take those moves and exacerbate it.

But there's no question there's been an increased interest in trading. You see it in search activity. In my mid-year outlook that I just published today showed search activity for both day trading as well as-- as call options. And we are seeing a tremendous amount of speculation within the options market. And that's really where you're seeing kind of that heightened retail frenzy, even more so than in kind of traditional equity market.

MYLES UDLAND: And I guess if we're thinking about sentiment at this point in the cycle-- because we saw the markets come back, and that first 20% happened so quickly, and then it said, OK, now we'll take a breather. Well, then the market went up again. And now we'll take a break. And it went up again, and again, and again.

And OK, we saw the pullback Thursday, but here we are with a 3% reversal on an intraday basis. It certainly seems that sentiment has shifted considerably. And as you look towards the second half of this year, are there big risks that you are concerned about? Or does it seem that, you know, maybe the-- maybe the data is going to actually back up the market as we get into the fall months here?

LIZ ANN SONDERS: I think sentiment is a bit of a risk. You know, there's a lot of similar-- lots of similarities, if not an even greater amount of euphoria and optimism, in the current environment as there was, say, in late January, early February. And I wrote about sentiment back in late January as a-- as a risk, not-- now, when sentiment gets to an extreme, either an extreme of despair, an extreme of euphoria, in and of itself, it doesn't suggest that the market is going to move contrary to that. It is a contrarian indicator. It tends to require some sort of catalyst.

The risk now is that a catalyst that might otherwise be a significant catalyst could cause a bigger pullback in the market because of that sentiment that we're seeing that's moving into kind of frothy territory, more on the behavioral side than on the attitudinal side. So you know, what those catalysts could be, we maybe saw a bit of it last week when we started to have concerns about a second wave of the virus in those early opening states, and that was enough to give you a 5% plus pullback in the market. But what's been interesting is that pullback did not bring sentiment in.

It actually kind of emboldened many of the more speculative options traders, and they're sort of pressing their bet. And I think that's a function of the condensed amount of time that we experience, both the bear market on the downside and the rally on the upside. You know, normally, it's price and time that has a longer-lasting effect on the psyche of investors. But man, we have condensed an entire cycle in a very short amount of time.

MYLES UDLAND: Well, and I think that that time element obviously makes this completely unique to anything anyone's seen. But there has been some suggestion that, you know, the March 2009 framework actually, psychologically, is one that's quite useful here. Because now while that sell-off was, what, October '07 all the way to the bottom, and we saw all that in a couple of months, as you outlined, there is some element of-- the market has moved quite quickly, but everyone still hates it. And so it would seem likely that that crowd who's upset about this move isn't going to end up being right. And in fact, they ended up remaining wrong really for-- for a decade, everyone who was mad about the Fed and so on and so forth.

LIZ ANN SONDERS: There are always similarities when you get to extremes, both market decline and expansion extremes, but also extremes of sentiment. What I think is-- is different in the current environment relative to 2009 is that in 2009, we certainly know with the benefit of hindsight that once through, to a large degree what the Fed did, once they were able to sort of stabilize the financial system and prevent a further implosion, that was at the heart of the problem. So then estimates for the economic recovery, you had a pretty decent amount of conviction that we could get back on strong economic footing at that point now that the financial system was stabilized.

This is a completely different animal, and there's optimism about the trajectory of the recovery, as we've seen so far. But I think it's premature to suggest that this is a V. That's the nature of and the law of small numbers, the percentage improvement off of such a compressed state at the outset makes the numbers look good. And remember, the left side of a W is a V. And I think the reality is going to be more rolling Ws as we deal with not just second wave of the virus risks, but also second-order economic effects, which I think are coming regardless of whether we have a serious second wave of the virus.

SEANA SMITH: And Liz Ann, going off of that, just at where we're trading today, the fact that we did see that big pullback last week and there was some of that risk back in the market-- you mentioned the sentiment risk a few minutes ago. But when we take a look at the levels today with the Dow still about 25,000, 27,500, we have the S&P still above 3,000, NASDAQ just short of 10,000 here, do you think the market is too optimistic about the trajection of-- or trajectory of this recovery? Because like you're saying, it's still a little bit early to say that we are in, or that we will get, that V-sharped recovery.

LIZ ANN SONDERS: The honest answer is, I don't know, nor does anybody, quite frankly. We have never had experience where we had a health crisis become an economic crisis by virtue of a full stop shutdown of the economy by not just the US government, but-- but globally. So we don't know, based on history, what it's like to reopen an economy after a multi-month shutdown. So all of us are just speculating.

I'm just concerned about second-order economic effects. Again, absent anything happening on the virus front, when you think about the ripple effects, when you think about capacity issues, say for the restaurant industry, many, if not most, restaurants can't stay afloat even at 75% occupancy, let alone 50%. Even if there is not another full-scale shutdown of the economy, which I don't think there is, as we saw today with the news out of Florida, where quite a few bars have actually had to shut down again because of incidents of the virus, they made that decision on their own.

So there are sort of consumer and business supply-demand effects here that have nothing to do with whether there's a shutdown in the economy, bankruptcies going up. So I just think the tentacles of this have yet to be accurately judged looking ahead. I-- look, I hope the market is right. I hope the market has just nailed this and that we truly are going to see a V bottom. I just think there's been so much damage done to the economy that to get back to something resembling pre-pandemic norm, I think, is a stretch.

MYLES UDLAND: All right, Liz Ann Sonders, Chief Investment Strategist at Charles Schwab. Always great to get your thoughts. Thanks so much for joining the program. We'll talk to you soon.