Liz Ann Sonders, managing director and chief investment strategist at Charles Schwab joined TheStreet to discuss how the Fed is navigating economic challenges.
Transcript:
SARA SILVERSTEIN: Do you think the Fed is doing a good job at trying to meet their mandates right now or over the past few years?
LIZ ANN SONDERS: You know, my concern is that the fact that the Fed is data dependent means that they are making decisions about monetary policy based on inherently lagging data and rearview mirror data. I don’t know that there necessarily is a better option right now, but the data dependency is such that they’re obviously not on a predetermined course. They’re reacting to the data. And so far the data is just not cooperating. You know, in their ideal world, they do something akin to crushing job openings without crushing jobs. So try to loosen the labor market a bit without causing a significant move up in the unemployment rate. But it’s a pretty narrow opening in the needle that they’re trying to thread.
I’m never an armchair quarterback when it comes to the Fed. I don’t believe in Fed bashing. I, I think they’re doing as good a job as they can. They concede that one of the problems is that they arguably stayed at the zero bound. They stayed in loose policy. They kept the balance sheet inflated, arguably for too long when they assumed that the inflation problem was transitory and they had to make up for that with the most aggressive tightening cycle in 40 years. But here we sit now and I think they are doing the best they can. But I also think emphasizing patience in this environment, absent inflation moving down to their target or the labor market, weakening is probably the right place to be at this point.
SARA SILVERSTEIN: And is this going to be one of the big inflection points that takes us out of this rising market that we’ve seen over many, many years?
LIZ ANN SONDERS: , I’m not sure that it’s expectations around Fed policy that has been as much of a needle mover as the broader fixed income and yields in particular in the Treasury market. So ultimately they’re related because say moves in the 10-year yield is a function of expectations about Fed policy longer term. So there is that connection. But when you look at market behavior, particularly since the midpoint of 2023, it has been very, very directly tied to moves in longer term yields. When you had last year the big jump in yields from below 4% on the 10 year in late July to 5% in late October. That directly corresponded to a 10% correction in the S&P, even more in the case of the NASDAQ. Then by the end of October, you started to see yields come down. You saw a big move from 5% down to below 3.8% That turned into a huge tailwind for the equity market initially. Also supportive of equal weight relative to cap weight of small cap stocks.
But then when we saw the lift back up in yields from 3.8 or so up to the recent high of 4.7, that caused some problems in the market, again, a bit of a pull back for the larger cap indexes, more pain for the smaller cap indexes because they obviously house smaller companies that generally have higher leverage and more floating rate debt. So it moves up and down and yields are going to have a more direct and near-term impact on those names. So that’s where I think the needle move is more direct is movements in yields versus just this parlor game that happens in the short term of, you know, will it be the July meeting, will it be the September meeting at which the Fed starts cutting. Will it be one rate cut or two rate cuts or something more than that. I think it’s those movements in yields and the, you know, action within the bond market. I think the bond market really sits in the driver’s seat for the equity market.
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