Bearish sentiment stemming from 'short-term money in the market': Strategist

Liz Ann Sonders, Charles Schwab Chief Investment Strategist, joins Yahoo Finance Live to discuss the market outlook for 2022.

Video transcript

JULIE HYMAN: Well, the longer this goes on, the more the markets maybe get used to it, right? Let's bring in Liz Ann Sonders, Chief Investment Strategist at Charles Schwab. And this is something that tends to happen, right? Even something as dramatic, Liz Ann-- and she's joining us on the phone-- even something as dramatic as a war, the market adjusts, especially the longer it goes on. Where are we hitting that adjustment period here? And what do you think the market is pricing in?

LIZ ANN SONDERS: Well, so adjust, yes and no. I think there are some aspects to this crisis that are a bit unique, not least being that the feeders through the energy channel potentially exacerbating an already difficult inflation environment. And in turn, maybe changing the thinking around the Fed plus the potential for liquidity issues cropping back up again.

So yes, we can look back at prior initiations of a military event and find that they have generally had a short-lived impact on the market, unless of course they turn into something more protracted that has global economic implications, or in this case, inflation implications. So I'd be really careful about dismissing this as just yet another event that has a short-lived impact on the market.

BRIAN SOZZI: Liz Ann, have you just found it surprising we haven't seen a really big drop of the market. We've seen recoveries intraday. It's been-- some of these clauses have been, I think, stoking some optimism out there. We have oil over $100 a barrel. We have the Fed still likely to raise rates in a couple of weeks. There's just there's a lot here coming out the market very quickly.

LIZ ANN SONDERS: There is, however, the market was in a downtrend prior to Russia invading Ukraine. I think we have to remember that. So if you-- even just last year, which was, obviously, well before the invasion, the average maximum drawdown within the S&P was 19% last year. Within the NASDAQ, it was 43% last year. You were already had the average maximum drawdown for the NASDAQ and Russell 2000 down more than 20% year to date before Russia invaded.

So the weakness was there. The initial reaction was to see that momentum exacerbate on the downside. But I think there's so much short-term money in the market-- algo-driven, quant-driven-- that might key off technically oversold conditions kicking in. Sentiment reversed really quickly into bearish territory as a contrarian indicator. That might have provided some support.

So I think this notion that the market's been fully resilient through this suggests that you're not focused as much on what the weakness came into play prior to the invasion. I think just there's been some bottom fishing that is happening given the weakness that preceded the invasion.

JULIE HYMAN: Liz Ann, one of the moves that's been pretty remarkable is the weakness preceding the invasion had at least partly to do with the expectation of the Fed, right, raising rates. I'm looking at a 10-year this morning that has made an incredible move downward in yield. And that's happened all across the yield curve here. Do you-- do you buy that. In other words, do you think that, indeed, the Fed is going to be much less hawkish here because of what's going on in Russia-Ukraine?

LIZ ANN SONDERS: Well, I'm not sure if that's solely the message coming from the move down from what, 205 to 178 on the 10-year. I think given what's going on in Russia-Ukraine, especially with the weaponization of money that the Western world has decided to at least initially combat that with, I think that has led to a flight to safety into havens, inclusive of treasuries. So I think a lot of that buying just is because of the uncertainty with regard to Russia, less so about a message with regard to Fed policy.

That said, first of all, it's two weeks between now and the Fed meeting, which these days is a lifetime, both in terms of the news coming out of Russia-Ukraine, but also the fact that we've got another jobs report. We've got another CPI report. Yes, you are seeing movement around in terms of number of rate hikes expected. We were never in that six or seven camp felt that it would probably be lower than that, simply because the Fed also plans to pull the lever of the balance sheet.

But I think with any potential liquidity issues, that's to be more in focus between now and the next Fed meeting to see whether there is impetus to pause altogether and not launch off the zero-bound. I'm not sure that's yet the best bet, but again, two weeks is a lot of time in terms of the implications for the Fed. And it's certainly possible that they hold off on raising rates, even if that's not yet built in to market expectations.

BRIAN SOZZI: If one is looking at their portfolio right now, Liz Ann, what adjustments should they be making? Should they be raising cash? Should they be tilted more to defensive names? How do you think about it?

LIZ ANN SONDERS: So first of all, the whole notion of raising cash to say, you know, go to cash-- who's the investor? You know, what's the risk tolerance? What's the time horizon? What are the income needs? What does the rest of the portfolio look like? What we have been emphasizing is that we're in the midst of all of this volatility in the market and intraday massive swings and sector rotations that are coming fast and furiously. The one area of consistent leadership has been quality, high quality, value, lowercase V.

I'm not saying the value indexes are consistently doing better, but the factors associated with value, strong free cash flow yield, dividend yield, positive earnings revisions, strong balance sheet, low debt, pricing power, those factors have been consistent leadership areas even within sectors like the growth trio, tech, consumer, discretionary, communication services, that have had some real downside moves that sort of value high quality, even within those growth year segments. So that, to me, is what investors ought to focus on.

And then the other recommendation we've made is maybe up the pace of the frequency of rebalancing. If you're a calendar-based rebalancer, meaning you do it maybe quarter end or year end, let the swings in your portfolio dictate when you should be maybe adding into weakness and trimming into strength and stay in gear that way without trying to forecast what the next 3% to 5% move is going to be up or down.

JULIE HYMAN: Love it. Actionable ideas for investors, Liz Ann. And you've been consistent on that value message as well. Liz Ann Sonders, great to talk to you as always, Chief Investment Strategist at Charles Schwab. Appreciate it. Before we--