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Liz Ane Thonder's joining us right now. Chief investment strategists over at Charles Schwad and Lizanne. What was most surprising to you what we learned from the Fed today or the market's reaction to it.
Well, the market reaction was quite stream. I don't think this was a big surprise. We actually were of the view that there was justification for the Fed pausing at this month's meeting today. Now, expectations were such, you were at about a ninety eight percent probability. You had the Timorros article that came out suggesting the Fed was going to do something, But it was I think pretty easy to expect a hawkish cut given stickiness and inflation and
relatively resilient growth. I guess what the market reacted to was the cutting in half of the number of rate cuts expected in twenty twenty five, not to mention the fact that you had a discent this time, and it was an interesting descent because you know, it's a brand new president in terms of the Cleveland Fed, So it was it was an extreme move on the downside, but we were already seeing a lot of churn and weakness under the surface really, since the election is just masked
by the until today strength by the max seven.
Right, and just took out the legs from them, and then there you go. Now you have negative breadth versus positive breath. At the end of the day, Lizanne, it was clear from the press or that there were some FED officials who were looking at potential policy changes as a way that their economy and growth and inflation forecast was shaping up for next year. How then do you manage your asset allocation when there is so much confusion.
Well, it's not just confusion around the path of FED policy,
but confusion around government policy. And I you know that there were so many reporters that tried to flesh that out from Powell, But he's in a position much like the rest of us, which is, you know, the ultimate shrug emoji, because particularly in in areas like immigration, like tariff and the playbook that we have from twenty eighteen with regard to tariffs, we just don't know when the announcements are going to come, whether this truly is a negotiating.
Tactic, or whether they will go to the extreme.
It's hard to argue against the idea that tariffs all else sql put downward pressure on growth, they put upward pressure on inflation, and that arguably is something that came into the mix in terms of summary of economic projections, and the bias now much more in favor of the risk of higher inflation relative to lower inflation, and that was a big switch from the September dots plot and summary of economic projection. So I think that was embedded in the market weakness today too.
I love the fact that you brought up a shrug emoji because Alex and I are saying there are so many of His answer is pretty much amounted to that. When it comes to the FEDS inflation target, he clarified that it is still two percent. It's not two and a half percent, it's not two is percent. What is your confidence though, that that's what is going to stick with given that there's so many things that are evolving and will evolve in twenty twenty five.
You know, I don't.
It's hard to have competence in a metric that is at least near term likely to be driven by government policy, particularly tariffs. Yes, you know, I mentioned the twenty eighteen playbook. The difference, of course is that in twenty eighteen. You know, the pro tariff folks will say, well, it didn't lead to inflation. Well, they were much more targeted, they tended to be in intermediate goods, they were much shallower in terms of percent, and we didn't otherwise have an inflationary backdrop.
Obviously a very different situation today, Not to mention broader, larger tariffs targeted on imports from multiple countries. What we did see in twenty eighteen is that tariff goods did see a big surge in inflation relative to non tariff goods. But we just don't know what twenty twenty five's playbook is going to look like.
But again it's hard to argue that.
The bias is an up at least near term and inflation to calibrate policy. And to the first part of your question, trying to trade from an acid allocation tactical or otherwise around that, I think it's a really tricky exercise. I think you want to sort of stay close to your sort of benchmark strategic acid allocation waitings, but really take advantage of volatility for maybe portfolio based rebalancing as opposed to waiting for the calendar to dictate rebalancing.
And then that gets into the ideal Liz and as the weather looking through some of these issues, meaning the uncertainty around the Trump administration, the potential volatility, and obviously the potential inflationary impact. I deride J. Powell for saying he's looking past it. Maybe that's what he has to say, But is there a case for investors to indeed look past it is certainly if you're a bottom up bus stock picking type of person.
Well, again, there's the timing issues. So with regard to tariffs and immigration that can be done via executive order, so that is near term, will be some point where we have more clarity and we.
Could start to look past that, particularly to.
The end of the year where you have potential to start to see some more of the pro growth policies, whether it's on the tax funt or the regulatory front. Those require congressional approval though, so we're talking about different animals here in terms of timing and in terms.
Of the process.
I think what we are likely to see is a focus on fundamentals, that connectivity between fundamentals, quality based fundamentals, trajectory in terms of earnings exclusive of any variability associated with government policy. I think that's where the focus is likely to be is where will those fundamentals be maintained with that growth bias, with that profitability, strength of balance sheet, interest coverage, exclusive of concerns about policy uncertainty.
So, lizam, where does that leave small caps in mid caps?
Well, I think the move up from you know, sub three eight to more than three and a half on the tenure today was certainly a big part of why you saw the big turnaround in small caps to the downside.
You know, most many.
Smaller companies, particularly the zombie companies, there's more variable rate debt and they are more at the mercy of what happens on the long end of the spectrum. And I think that will continue to be the case, that small caps will be at the mercy of the move in the bond market. And so I think you have opportunities. But what we have been saying is when you go down the cap spectrum looking for opportunities, do not sacrifice quality.
We had a low quality trade that kicked in in the last month or so.
We were saying, fade that low quality trade down the cap spectrum. If you're going to go down the cap spectrum absolutely stay up in quality.
So, Lizanne, at the end of the day, how much do you read into today's sell off in stocks and bonds and doesn't set the tone for the remaining days of twenty twenty four.
Well, there was some signs of some turn under the surface. If you look at the NASDAC. Obviously the market has done really well since election day, but the average member maximum drawed down with then the SMP is negative nine percent just in see election. It's negative twenty one percent in the Nasdaq just in see election, and that doesn't include today. So we were seeing some underlying weakness, it was just masked by what the cap weighted indexes were doing.
I think that type of turn under the surface could continue.
We may continue to see some.
Catch down by their recent sort of high momentum leaders. I would look for the point where you start to see some grinding better performance under the surface, much like we started to see back in the mid July period of time. So that's what I'm keeping a close eye on as we go through this process of weakness, even if it's only a one day phenomenon.
I have no idea that's the case.
Well, that kind of circles us back to corporate earnings, Lisanne.
I mean you mentioned what we saw earlier this year with some of the same fears of materialized, and then when companies started to report, at least the larger cap companies, all was well, relatively speaking, And I do wonder if maybe we see a repeat of that where people do rush back to some of those big tech just big cap names, not just tech, but big cat names, those that have proven to have the cash flow of the revenue course the profitability to justify their valuations.
I think you're right, Romain, and it's not just profitability but profit margins. So expectations for calendar your twenty twenty five earnings, both for the S and P but also down the cap spectrum in an index like the rest of two.
Thousand are relatively lofty.
In the case of the S and P five hundred, those fairly lofty double digit kind of gains and earnings are predicated on record breaking profit margins. The good news is is that forward twelve month profit margin estimates continue to go higher. If that is maintained and you continue to see decent productivity numbers, then I think you're okay.
In those segments of the market where.
You've got that profitability profile. But I think you're right. I think that trajectory of profitability and in particular maintenance if not growth and profit margins.
Is really key to story in twenty twenty five.
All right, liz Anne, really appreciate your joining us today. Fantastic insight from liz Anne Sanders, Chief Investment Strategies over at Charles Schwab on the selloff