The way the economy looked before is not the way it's going to look down the road: Strategist

Charles Schwab Chief Investment Strategist Liz Ann Sonders joins Yahoo Finance’s On The Move to address how U.S. markets are faring and discuss how the coronavirus has impacted the economy.

Video Transcript

JULIE HYMAN: Well, as we look at the sort of lack of market action today and how it's been intertwined with the headlines about this pandemic, I want to bring in Liz Ann Sonders. She's Charles Schwab chief investment strategist, joining us from Florida.

And Liz Ann, as we look at the market action recently, yes, we had a rebound. But then we had sort of some sideways action. And as you hear all this talk about reopening and the risks inherent in it and look sort of below the hood, underneath the hood, of the market action, what does it tell you about whether our levels right now are justified?

LIZ ANN SONDERS: I think it was, I suppose, somewhat easy to argue that, at down 35% at the March 23 lows, the market was pricing in some semblance of an expected outcome, if you do back of the envelope math in terms of the compression likely to happen in GDP, the spike in the unemployment rate, the losses in payrolls. Arguably, though, the move up from that point, where we've retraced almost 2/3 of the rally, now, arguably, price is in a pretty close to best-case scenario.

And I think there are several factors to worry about. There are sort of two second factors, second-order economic impacts, as bankruptcies pick up and temporary layoffs turn into permanent job losses and then, of course, the second wave of the virus itself, which has been much discussed.

And then earnings actually, ultimately, coming out closer to much lower top-down estimates than the bottom-up estimates, which means, then, that the valuation doesn't look anything close to reasonable at this point. Right now, it's kind of target practice.

But I think there are risks, given where we're in the market and given, as you touched on, Julie, the narrowness in this latest part of the rally-- a very, very small percentage of stocks that are driving the rally.

ADAM SHAPIRO: Hey, Liz Ann, it's Adam. So if I'm just an average investor and I'm listening to what you just said and then I look at that CPI reading we got today-- inflation actually not in any way a problem-- it's actually deflation we should be worried about. It seems to me like people will be holding onto their money. And in fact, any talk of recovery is inaccurate in that this market might be well overvalued right now.

LIZ ANN SONDERS: Well, I do think we are likely to see a somewhat secular shift in the economy, even when we're largely out of the environment we're in right now and most of the economy is opened back up. I think you're absolutely right.

I think a desire to continue to sort of boost savings at the expense of consumption, certainly at the expense of debt-fueled consumption-- and that was a trend already under way in the last expansion, given the pain associated with the financial crisis. Now I think it's to an even greater degree.

So this emphasis that the economy has had on consumption on the services side of the economy, both of which are being hit most significantly, means, I think, when we look medium to longer-term, we're going to see a shift in the economy away from the consumer and services, hopefully more toward investment. That's not a bad shift, although it does displace a lot of workers. So I think the way the economy looked before is not the way it's going to look down the road.

JULIE HYMAN: At the same time, Liz Ann, what is that going to mean for markets? We've had an emerging narrative over the past couple of days. As we talked to investors, they brought up the phrase, don't fight the Fed, that well-worn phrase. Once again, here's the Fed today, buying corporate debt in the form of ETFs. As long as the Fed is accommodative, is that going to-- I mean, it feels like the past few months never happened. It's the same narrative, that as long as the Fed is accommodative and supportive, stocks can go up.

LIZ ANN SONDERS: That is a narrative that is persistent. It's a bit surprising, given that in the case of the financial crisis, when the Fed stepped in with what at the time were unprecedented programs that they've now taken to the nth degree this time. Really, what we now know in hindsight is that the Fed was attempting to stabilize the financial system. The problem was in the financial system.

Now what the Fed is trying to do is keep a health and economic crisis, the latter being driven by the health crisis, from becoming a financial system crisis. So they can provide that bridge. The narrative still exists. But I think it doesn't eliminate the risk associated with those second order effects, virus-related and economic-related, that we have yet to see unfold. Hopefully they won't.

And I think the fact that the Fed's balance sheet is not expanding right now, that they're actually not having to utilize some of these newer programs that were put in as a backstop, is actually a relatively positive story. I think if they were forced to start dramatically increasing their balance sheet again or having to step in in force with some of these programs because companies needed to utilize them not as a last resort but as an only resort, I think that would be a more negative sign.

The problem, of course, is that Fed liquidity is not the elixir for what ails us in this environment-- certainly not from a health perspective.

ADAM SHAPIRO: Liz Ann, it's Adam again. And my computer took a hit. So if you have just answered this, forgive me. But this question of the Fed now buying the bond ETFs-- would that have any kind of negative or positive impact? Again, for me as an average investor, is this going to happen in the background? Because it's treasury which is actually providing the funding, more so, for this to take place.

LIZ ANN SONDERS: I think it has an indirect benefit on the equity market. We know that in most cycles, there is a direct tie to what's going on in the credit markets and what's going on in the stock market, particularly as you move sort of down the risk spectrum in the corporate credit market. That's where you get, from a risk profile perspective, that sort of correlation and tie to the equity market.

I think part of the reason for a stability rally in the equity market were these vehicles that the Fed stepped in with, not only pulling pages from the '08 playbook, but adding a number of new programs. Providing that allowance to go into the corporate credit market, I think, has been a stabilizer for the equity market.

But of course, it doesn't prevent ongoing bankruptcies, ongoing potential defaults. And I think that the market may be-- the equity market may be underestimating some of those risks, even if, to date, what the Fed has done in the credit market has been more than just psychologically a benefit to the equity market.

JULIE HYMAN: Liz Ann, it's good to see you. Stay well. Liz Ann Sonders of Charles Schwab. She's the chief investment strategist. Appreciate it.

LIZ ANN SONDERS: Thank you.