Schwab's Liz Ann Sonders talks the recent market rebound
Speakers
Summary
- Index-level drawdowns are deceptively mild (S&P -3%, Nasdaq -6% YTD), while average stock drawdowns are severe (S&P -14%, Nasdaq -27%), indicating micro-level bear markets.
- Short attention span money (retail meme traders, CTAs, and institutional speculators) accounts for 25% or more of daily trading volume, driving violent market rotations.
- The economy is experiencing a modern stagflation (slowing growth combined with sticky inflation, though without massive unemployment), which is forcing the Federal Reserve to delay expected rate cuts.
Trade Ideas
Higher oil prices holding back the major averages today as the war in Iran continues to fuel uncertainty among investors. A direct conflict involving Iran threatens Middle Eastern oil supply chains. This geopolitical premium restricts global supply, driving up crude oil prices and directly benefiting oil commodities and energy sector equities. LONG because geopolitical supply shocks create immediate upward price pressure on energy assets. De-escalation of the Middle East conflict or a sudden drop in global energy demand due to a macroeconomic recession.
Maximum drawdown for the S&P is only 3%... But under the surface there has been more violence. So the average member has had a max drawdown in the S&P of 14%. Headline market-cap weighted indices are being propped up by a handful of mega-cap stocks, masking severe underlying weakness across the broader market. Equal-weight and small-cap indices reflect this internal micro-level bear market more accurately, meaning passive broad-market investors are taking on hidden risks. WATCH because the divergence between mega-caps and the average stock suggests a fragile market foundation that requires active stock picking and rebalancing rather than passive equal-weight exposure. Market breadth suddenly expands, causing the average stock to catch up to the mega-caps and driving a massive rally in equal-weight and small-cap indices.
Now we think of stagflation as more of a generic, a slowdown in growth and a pickup of inflation. But it does put the Fed in a pickle. And that's why you're seeing rate cut expectations get pushed further out into the year. Sticky inflation prevents the Federal Reserve from cutting interest rates as previously expected by the market. Higher-for-longer interest rates directly depress the prices of long-duration Treasury bonds, as their fixed yields become less attractive relative to new issuance. SHORT because delayed rate cuts keep bond yields elevated, pushing long-duration bond prices down. A sudden, severe economic recession or credit event that forces the Fed into emergency rate cuts, which would cause long-duration bonds to rally.
