One On One With Liz Ann Sonders, Chief Investment Strategist At Charles Schwab
Monday, May 15, 2006
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SUSIE GHARIB: Our guest tonight is cautious on the markets and is telling her clients that the stock market is quote, due for some pain over the next six to 12 months. Joining us now, Liz Ann Sonders, chief investment strategist at Charles Schwab. Hi, Liz Ann.
LIZ ANN SONDERS, CHIEF INVESTMENT STRATEGIST, CHARLES SCHWAB: Hi, Susie.
GHARIB: So why the caution? We see the Dow hitting new six year highs. Why the caution?
SONDERS: We have been optimistic for a long time actually. We went bullish on the U.S. market back in March of `03 and it was only last year that we went to neutral which is really not a bearish position, in that it`s -- we`re recommending our clients be in a normal allocation to equity. But there is a lot of forces that I think are working against the market right now and I think some of those came to fruition Thursday and Friday with the weakness that we saw. Concerns about inflation and often times the fear of inflation can be just a big problem for the market as actual inflation. You`ve got to break out on the upside of long-term interest rates. You`ve got a declining dollar, certainly earnings and evaluation are (INAUDIBLE). But it`s been a fairly weak market rally in terms of breath so we haven`t seen the kind of participation that you would like to see. Sentiment conditions have been somewhat mixed. So I think that there is a lot of risks for the market right now. The least of which is just the seasonals that tend to show both weakness in the summer months in general, but also weakness at this time of year in a midterm election year which we have and the political rancor associated with that is pretty nasty right now.
GHARIB: So are you expecting some kind of correction over the next couple of months?
SONDERS: You know, this is the third longest spin we`ve had without a 10 percent correction in the market. I would like to think the market could go to a correction that would be less severe than 10 percent and we can continue that span. But I think something relatively meaningful is probably in the offing I would say in the next six months. I don`t know whether trying to time it perfectly beginning and end, if it`s something that is limited to say 5 percent or so for long-term investors, they may just want to ride it out. But I think we are overdue for at least some more volatility if not a serious correction.
GHARIB: We saw today that commodity prices really fell sharply and here I am not talking not just about gold and silver but also copper and zinc and nickel. Was that good for the market?
SONDERS: Well, that`s the thing. The parabolic increase in commodity prices I think really hit the market last week when it came in conjunction with what had been a view that the Fed would be able to pause in its rate hike cycle and then commodity prices started telling investors wait a minute. If the conditions are still in place come June 28 and 29th, the Fed may not be able to pause given the messages, those we`re sending. So that may be one of the reasons why the market had the ability to rally today is because of that reprieve in commodity prices. If that continues, it may set the stage for the Fed to have reason to consider a pause.
GHARIB: If the Fed does pause, let`s just say it does take a break starting at the June meeting, would you change your mind about the outlook for the markets?
SONDERS: You know, not necessarily. But I would say there`s still six weeks between now and then. You know, you and I have spoken, Susie. It the case that, I don`t think the Fed has the answer of what they`re going to do in June 28th in an envelope and they are just not sharing the answer with the rest of us. I think there is a lot of data that`s going to come in between now and then. What my concern is that if we were to maintain some of the same conditions as now, strong economy, rapidly rising commodity prices, rising long- and short-term interest rates, falling dollar, strong economic news, I think if the Fed were to pause in that environment, I think that would be perceived more negatively. If we get an orderly decline in commodities. If we get the pressure off the dollar. If we get some signs of slowdown in the economy, then I think a pause would be viewed favorably. In of itself, it`s not necessarily goes to change our opinion.
GHARIB: So what are you telling your Charles Schwab clients, the ones who are long-term individual investors? Where should they put their money?
SONDERS: In terms of the broad aspect classes, we`ve been recommending an overweight to the international equity markets. As I mentioned, the neutral weight to the U.S. equity markets and then a maximum underweight to the U.S. fixed income market. (INAUDIBLE)
GHARIB: When you talk about U.S. stocks, like what, sectors?
SONDERS: Sectors that we`re overweighting in the U.S. market are health care, industrials and technology and we`re underweighting energy, utilities and consumer discretionary.
GHARIB: All right. We`ll leave it there. Thank you so much, Liz Ann, appreciate having you on the program.
SONDERS: My pleasure. Thank you. GHARIB: My guest tonight, Liz Ann Sonders, chief investment strategist at Charles Schwab.
