Pod Insights Masters in Business Market Cycles and Investment Strategy With Charles Schwab's Liz Ann Sonders About this episode Barry speaks with Liz Ann Sonders, chief investment strategist at Charles Schwab. Liz Ann focuses on the entire economy. She’s also the cohost of the On Investing podcast and a keynote speaker at numerous company and industry conferences. Liz Ann and Barry discuss her investment experience, working with Charles Schwab, and market cycles.
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1:44 Speaker 03 This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
1:52 Barry Ritholtz? This week on the podcast, strap yourself in for another great one. Lizanne Sonders, Chief Investment Strategist at Schwab, helping to manage $11 trillion in client assets. What a fascinating career she's had. She's been on all of the best of lists. She's just really insightful. What she does is really kind of unique. She combines top-down market analysis with looking at everything from sentiment to economic data, to fund flows, to really what the clients of Schwab are doing. I know Liz for almost 25 years. Every time I speak with her, it's always great.
2:34 Barry Ritholtz? This is another conversation that is also fabulous. With no further ado, my discussion with Lizanne Saunders.
2:42 Speaker 05 Always great to see you.
2:43 Barry Ritholtz? I know. I always have so much-
2:45 Speaker 05 We've known each other for a long time.
2:46 Barry Ritholtz? A long time. It's always so much fun chatting with you. I want to talk about what you're doing with the podcast and what you're doing at Schwab, but I have to start with a little bit of your background. Undergraduate, economics and poli sci at Delaware, MBA in finance from Fordham, which at the time you went there, was it called Gabeli?
3:07 Speaker 05 No, it was not.
3:07 Barry Ritholtz? It's now called the Gabeli School of Business. Was the career plan always Wall Street?
3:13 Speaker 05 No. Honestly, I think if you brought me back to my college days and asked, what is your career plan? If I was honest, I probably would have said, not quite sure yet. The decision to do a double major there was to keep it very open and broad. All I knew was that I wanted to live and work in New York City. So, got out of undergrad, pounded the pavement in New York, but across a spectrum of industries, not all Wall Street. I interviewed at a sports marketing firm and an ad agency. And I had two interviews in a row at Zweig Avatar, did a lot of research on the company, which by the way, this was in 1986.
3:58 Speaker 05 So, doing research on a company meant going to the library, pulling up a microfiche machine, actually cranking the handle-
4:05 Barry Ritholtz? I recall.
4:05 Speaker 05 -and look at newspaper clippings. And was fascinated by Marty Zweig, the co-founder, and-
4:13 Speaker 05 Enjoyed the interview process, liked the people with whom I met and I don't know, a little voice just said, "This, this seems to make sense."
4:22 Barry Ritholtz? I recall reading a book Marty Zweig wrote, I want to say in the late 90s, when I was on a trading desk, winning on Wall Street.
4:30 Speaker 05 Late 80s.
4:31 Barry Ritholtz? Late 80s, well, I got his book when I started around the time of the Netscape IPO.
4:37 Speaker 05 He did, you know, newer versions, he did updated versions, but I think-
4:42 Barry Ritholtz? So whatever that version was in 96, 97, and I vividly recall that, how did you, how did you get the gig with Marty Zweig? What was that like?
4:51 Speaker 05 Uh, it, I was a grunt at the outset. I did whatever they needed me to do, but they were a firm that believed in promoting from within and educating their young people. So I saw that as an opportunity. They, they paid for grad school 100%, so I made the easy financial decision to do that at night while still earning a living and having my education paid for. And so many things that I learned from Marty, I consider him the first mentor, whether he realized it or, or not.
5:31 Barry Ritholtz? People, by the way, people don't realize, especially the generation that came of age in 2000, what a legend he was.
5:39 Speaker 05 Oh, unbelievable legend.
5:40 Barry Ritholtz? I think at one point in time, he owned the, the most expensive apartment in the United States. Is that, is that true?
5:46 Speaker 05 Uh, yes, it was the top three floors of the Pierre, which is now owned by the Commerce Secretary.
5:55 Barry Ritholtz? Huh, that's amazing. And he was always the answer to, "Hey, do any of these technicians make any money?" And the answer was, "Yeah, look at Marty Zweig." I mean, for, for the younger folks, go look up Marty Zweig, he was absolutely a legend. I remember him from my early days because he was on Rukeyser.
6:13 Speaker 05 He was one of the originals on, on the original Wall Street Week.
6:16 Barry Ritholtz? Yep. I mean, back in the day when all the financial media was an hour of television a week.
6:21 Speaker 05 That was it. Not even, it was a half hour. Eight thirty P M. Friday nights.
6:24 Barry Ritholtz? That's right.
6:25 Speaker 05 On PBS, produced by Maryland Public Television. And Marty was not only one of the original panelists, he was, I think, the original elf. As as Lou used to describe them.
6:37 Barry Ritholtz? The people came back on a regular basis.
6:39 Speaker 05 That's another thing that intrigued me about joining the firm is I remember getting a little bit of a kind of a wink, wink, nod, nod from a an economics professor that I had, not just to me, but to the class. And he made a funny comment about, given that one of the the jobs that we had as students was to read the Wall Street Journal every day and just keep up on markets and the economy. And that if you had too many late nights at the Stone Balloon, you might want to just get a really brilliant thirty minute recap by watching Wall Street Week on Friday night before you then go out. So I thought, all right, I'll see what this Wall Street Week is all about.
7:21 Speaker 05 And so I started watching it before I joined the business, before I started at at Zwig Avatar. And and then I joined the show in nineteen ninety seven, which was surreal.
7:34 Barry Ritholtz? So you were not that far out of school when you started?
7:37 Speaker 05 Well, I was, yeah, I was eleven years. So since you and I have talked about our first experience together, which was on TV.
7:46 Barry Ritholtz? Was my first TV appearance on Kudlow, right.
7:49 Speaker 05 And I I went on the show as a special guest. So I remember getting the the little, you know, pink slip from the receptionist that told you who had called. There was voicemail at that time that said.
8:03 Barry Ritholtz? Louis Rukaiser called.
8:04 Speaker 05 Like Rich DeBraff, the producer of Wall Street Week called, they'd like you to come on as a guest. And I thought it was somebody playing a prank on me.
8:10 Barry Ritholtz? Oh, really?
8:10 Speaker 05 Yeah, until I called and it was legit. And I went on as a guest. And then in shortly after that, they asked me to become a regular panelist. And it was a thrill.
8:22 Barry Ritholtz? So you were at Zwig for a number of years. How'd you end up? Thirteen years? Wow, that's a long time.
8:27 Speaker 05 Eighty-six to ninety-nine.
8:28 Barry Ritholtz? How did you end up at U S Trust?
8:31 Speaker 05 So that was kind of funny. I so I was on the Avatar side of this Yg Avatar broad set of companies, which was the institutional money management side. I was a portfolio manager, co-ran stock selection, but I was always much more intrigued by, interested in, and with a desire to spend more of my time doing top-down macro research.
8:54 Barry Ritholtz? As opposed to bottom-up.
8:55 Speaker 05 As a bottom, I just, it, it, the, the inner voice said, you don't really love this that much. And there wasn't really an opportunity for that. I, I, it wasn't that I was pigeonholed, but, but it was a growing role as a portfolio manager. So I got recruited over to US Trust to co-run their large-cap growth area, which, which put me yet again in that position, but felt like the platform was broader. And my inclusion on the Investment Policy Committee, they actually purposely wanted some top-down analysis based on my learnings for.
9:32 Barry Ritholtz? Large-cap growth means here's the universe, it's 100 of the S and P 500.
9:37 Speaker 05 And we were a concentrated manager, only owning, no, less than 25 typically, with a, with a four to five-year holding period.
9:45 Barry Ritholtz? So not a closet indexer, high, high active share.
9:49 Speaker 05 But I also didn't love the pigeonholing aspect of it, where, you know, the mantra had to be, large-cap growth. I, I, I liked thinking bigger picture and thinking about different parts of the market cycle and what works. So 10 months after I joined US Trust, Schwab acquired US Trust.
10:09 Barry Ritholtz? That was 2000?
10:10 Speaker 05 That was 2000.
10:11 Barry Ritholtz? And you've been with Schwab for a quarter century?
10:13 Speaker 05 For, it'll be 26 years, at the beginning of next year. And the, the, when I realized I did indeed want to be adopted by the new parent company, was when Chuck Schwab himself came to New York with our CEO at the time, Dave Patrick, and sat with me and said, we would like to create this role of Chief Investment Strategist, which didn't exist at Schwab before. This was. The beginning of our entree into actually giving advice as opposed to just being a platform for traders.
10:48 Barry Ritholtz? So let's dive into that. So I was going to ask you what the process was like, but they acquired US Trust for the assets and for the platform. You were a bonus that came along with it.
11:00 Speaker 05 Well, that's kind of you to say.
11:02 Barry Ritholtz? Well.
11:03 Speaker 05 They did offer me the role. It had not existed before.
11:07 Barry Ritholtz? That's a big deal.
11:08 Speaker 05 And I said, yes, please.
11:10 Barry Ritholtz? Yeah, absolutely.
11:10 Speaker 05 And the rest is 26 years of history.
11:14 Barry Ritholtz? So let's dive into this. What are the, let's take a look at the numbers. On the Schwab platform, as a custodian or however Schwab is touching a 401k, how many trillions of dollars are on that platform?
11:29 Speaker 05 11.23 trillion.
11:31 Barry Ritholtz? All right. So keep working at it.
11:33 Speaker 05 And that is with a T. Yeah, yeah.
11:35 Barry Ritholtz? Trillion with a T.
11:36 Speaker 05 About a third of the size of the US economy.
11:37 Barry Ritholtz? Wow, that's unbelievable. And at the time, what was Schwab in 2000?
11:45 Speaker 05 Oh, gosh. You know what? It was less than that because I remember getting this little...
11:50 Barry Ritholtz? Plexiglas plaque?
11:51 Speaker 05 Well, no, it was a holder for sticky notes.
11:55 Barry Ritholtz? Uh huh.
11:56 Speaker 05 And it had a star on it and it said, you know, 1 trillion in KleinSis. But that was after the acquisition of me and...
12:05 Barry Ritholtz? So that's an incredible growth. Schwab really is a platform that are so many things to so many different people. There's an institutional business. There's a business and full disclosure, we custody at our firm at Schwab, most of our assets are there. So you custody for RIAs and others. Self-directed investors, individuals. Who doesn't Schwab work with? It's pretty much everybody in the industry.
12:33 Speaker 05 Well, traditional institutions. So the way we define institutional, when we talk about it and use that term somewhat generically, we're actually referring to the part of the business that you're involved with. So independent wealth management firms, RIAs that platform with Schwab via the custody of assets, but a heck of a lot more than just that. So that's how we defined institutional. Of the...
12:59 Speaker 05 And I'm totally using rounded numbers here, but of the 10 of the 11 and 1/4 trillion is about evenly divided between individual investors on our platform.
13:10 Barry Ritholtz? Self-directed.
13:11 Speaker 05 Self-directed and, well, not always. No, we have, we have a whole wealth management arm that's, that all feeds not just to the individual investor side of what we do, but to people in your world.
13:22 Barry Ritholtz? Schwab Advisors.
13:23 Speaker 05 So advisors on our platform. So that's about evenly split. And then the remainder is workplace services. So stock plans for big companies and managing 401ks. So it's uh, what we, but we, we're dominated by individual investors, even on the quote institutional side, because most of the advisors on our platform manage money for individuals.
13:50 Barry Ritholtz? Hmm, that's really, that's really interesting.
13:52 Speaker 05 So we would consider the advisor our client, but we're, we're providing a platform there for them, you guys, to advise, for the most part, individual investors.
14:03 Barry Ritholtz? And I know I've told you the story before, but when we launched RWM in 2013, we launched with TD, years later acquired by Schwab, hold that aside. And we are, were very data-driven. We ran a lot of analytics. And every time we didn't win a prospect, when we would go through the list of the reasons, the number one reason is, hey, you guys don't custody with Schwab and my money is at Schwab. And call us if you ever decide to.
14:33 Speaker 05 Absolutely true.
14:34 Barry Ritholtz? Absolutely true. And finally, we all looked at each other, hey, there's no reason not to open a second custodian. And so we did. And it caused like a flood of new clients and new families joining us because.
14:47 Speaker 05 Well, well done.
14:48 Barry Ritholtz? But, but the crazy thing is, it's like, I have never seen a financial institution with that much brand loyalty from the audience, from the clients. Because think about it, when you talk to people about Wells Fargo or Citibank or any large financial traditional bank. Um, maybe a little bit at JP Morgan Chase. But for the most part, no one says, oh, I don't want to be with you. You're not affiliated with, I'm making up stuff, KeyBank. But we just heard it so many times. It's like, all right, you only have to hit me in the head so many times before I realize there's a, there's an issue here.
15:24 Speaker 05 The power of our reputation is really extraordinary and.
15:28 Barry Ritholtz? And Schwab dates back, you know.
15:30 Speaker 05 About fifty-three years, fifty-four years.
15:33 Barry Ritholtz? Wow, that's amazing.
15:33 Speaker 05 Yeah, the early nineteen seventies. Um, and, you know, Chuck has, has written about, uh, the history of Schwab and his history. Uh, his most recent book was called Invested and it was essentially a memoir of, of his time in this, uh, business.
15:51 Barry Ritholtz? And when you say Chuck.
15:53 Speaker 05 Chuck Schwab himself.
15:54 Barry Ritholtz? Chuck Schwab, who people used to think wasn't a real guy.
15:57 Speaker 05 No, it's a real guy.
15:58 Barry Ritholtz? The guy in the commercials is him.
15:59 Speaker 05 Is him.
16:00 Barry Ritholtz? And he's still up and about. You were telling me he was, he's just won a golf tournament in eighty-eight?
16:05 Speaker 05 Uh, last year he won the Nantucket Golf Club.
16:08 Barry Ritholtz? That's unbelievable.
16:09 Speaker 05 Member, member at eighty-seven and he almost won it again this year at, uh, at eighty-eight. So regularly shoots below his age. Still a very active chair of the board. And, uh, but, uh, the, the, the culture that he has imbued in, in Schwab is really second to none. And, you know, our, our sort of corporate, for, for lack of a better word, tagline is through client's eyes. And he has fostered this live, eat and breathe. Everything you do has to be from the perspective of, of clients.
16:42 Barry Ritholtz? So you're really the perfect person to ask a question and I'll ask it specifically about Schwab. But it's obviously true about the entire industry. Um, you've witnessed a shift from a lot of self-directed investors, um, over to the advisor-driven side. What has that process been like at Schwab?
17:06 Speaker 05 Um, so it's not just.
17:07 Barry Ritholtz? Trillions of dollars.
17:08 Speaker 05 Right, not just the advisor side, but.
17:12 Speaker 05 Investors at Schwab who who want guidance, who want advice, whether it's through advisors on our platform or directly with us on our private client side of the the business. And it's just the natural evolution of Schwab moving decades ago from a platform for the self-directed to a behemoth that actually provides that guidance and advice now, both directly through certain channels and indirectly through the advisor channel.
17:47 Barry Ritholtz? So, true or false, and I love this question because so many people doubt it. We are today in a golden age for investing for individuals. How do you how do you answer that?
18:01 Speaker 05 Can I say yes?
18:02 Barry Ritholtz? Yeah, true.
18:03 Speaker 05 Just yes. No, I didn't say true. I said yes.
18:06 Barry Ritholtz? Yes, golden age of investing.
18:07 Speaker 05 Well, I think it's both true and false, depending on how you define
18:11 Barry Ritholtz? Okay, explain.
18:12 Speaker 05 Golden age of investing. I I think we are, as it relates to individual investors, that understand that discipline is such an important part of the process, that they don't think of get in, get out as investing strategies. I I fully agree that those are really gambling on moments in time. You wrote about it brilliantly in in your book, The Emotional Side. And so I think it's true in the sense that a lot of those more seasoned investors that take that disciplined approach are are more equipped now and have more access to information and guidance.
18:56 Speaker 05 And when used in the right way, has been to the great benefit of their success. But then you have retail traders, which I'm not here to say that they're, you know, the ultimate contrarian indicator. But I think the perspective there is one of very short time horizons. The, you know, buy the dip mentality, which, you know, to their credit.
19:19 Barry Ritholtz? Works in a bull market.
19:20 Speaker 05 It works in a bull market. But a lot of the, you know, younger retail trader that was born out of the pandemic era. Uh, it's not that they have blinders on to the long term or the big picture, but they've been, they've been, I guess so far anyway, to your point, properly schooled by virtue of buy the tip has worked. But I'm, I'm starting to get some anecdotal evidence that there, uh, I'm not sure that there is a full understanding of what a market cycle actually looks like and that there is downside. Um, so I, I think there, there's more bifurcation and there's a wider spread in terms of, of
20:04 Speaker 05 how investors are approaching the market or how traders are approaching the market. And they, they, they're not in conflict, but they're kind of at different ends of the spectrum from a what works, what doesn't work. What are the benefits of taking a long-term approach, having those disciplines as opposed to just, you know, FOMO, I'm in and, you know, buy every dip.
20:27 Barry Ritholtz? Think about everybody who was born in the 1990s. By the time they come out of college, post-financial crisis, they've pretty much only known
20:39 Speaker 05 Right.
20:39 Barry Ritholtz? one of the greatest rampaging bull markets in history.
20:42 Speaker 05 And COVID was, was brutal from an economic and market perspective, but for, it was five weeks in the case of the market.
20:48 Barry Ritholtz? Right, mid-February to March.
20:49 Speaker 05 And it was two months in the case of the recession, so.
20:51 Barry Ritholtz? Although people still didn't believe it throughout that summer as, as from the March 2020 lows till the end of the year, I think the S and P 500 was up 69% and people fought it the whole way because their personal experience didn't jive with what they were
21:07 Speaker 05 Right, exactly.
21:08 Barry Ritholtz? seeing in equities, which, uh, which is fascinating. Coming up, we continue our conversation with Lizanne Saunders, uh, discussing her experience as a market strategist at Schwab. I'm Barry Ritholtz, you're listening to Masters in Business on Bloomberg Radio.
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23:41 Barry Ritholtz? I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Lizanne Saunders. She is the Chief Market Strategist for Schwab, helping to oversee 11-plus trillion dollars in client assets. So Schwab created the Market Strategist role for you. What does it mean being a Market Strategist? How does that differ from either a PM on the equity side or an economist more broadly?
24:15 Speaker 05 Well, it certainly differentiated from a PM in that I am not, I'm not picking stocks. I'm not a trader. I don't analyze individual stocks. So it's purely top-down.
24:27 Barry Ritholtz? Top-down, meaning markets, economy?
24:29 Speaker 05 Yes.
24:30 Barry Ritholtz? Do you look at sectors? Do you look at fixed income?
24:33 Speaker 05 Yeah, we, no, so we have, my colleague and co-host on our investment podcast is Kathy Jones. So she's my counterpart on the fixed income side. She's our Chief Fixed Income Strategist. And I say often, it sounds like it's jokingly, but it's actually quite serious, that I was thrilled when we brought Kathy on because then I was able to stop pretending like I was a deep dive expert in the fixed income side of things. My background is on the equity side of things. But what's unique, I think, about this role as it is, as it has existed in the almost 26 years that I've been at Schwab and have been in this role, is it blends the market analysis with the economic analysis. So we don't have these
25:17 Speaker 05 distinct roles of Chief Economist and Chief Investment Strategist. And that was always pleasing to me because I, I'm not sure I would either be as effective or enjoy what I do as much if I had to have my market views beholden to economic views that were completely distinct. I think having that, that overlap in analysis has been a benefit. I also, because our investor base are almost all individual investors, that's a very different audience than if you're one of the big investment banking, research, wirehouse firms, where
25:57 Speaker 05 a good chunk of your client base that is, that is a consumer of strategists' work.
26:05 Speaker 05 Being institutions, I think it's a very different animal in terms of what is valuable, what makes sense, and maybe importantly, again, in keeping with your book, you know, thinking about not just what matters, but what doesn't matter, what shouldn't matter. And I remember one of the first things that Chuck talked to me about 25 years ago was him not being a believer in the whole year-end price target.
26:31 Barry Ritholtz? Mm-hmm.
26:32 Speaker 05 Which was music to my ears, because I think particularly for individual investors, there's really not that much practical value to that. It's sort of one point in time. Every strategist has to adjust those forecasts constantly. It doesn't tell you about how to manage through market cycles. It's just one endpoint to one endpoint. And so that is certainly one of the differentiators as well. In addition to having that blended market analysis and economic analysis role, not sort of falling into the trap of the way strategists get pitted against one another.
27:09 Barry Ritholtz? I love that you call it a trap, because it's easy to see what happens when people make a forecast like that, and then they tend to marry it regardless of what data comes along.
27:22 Speaker 05 Right, right.
27:23 Barry Ritholtz? I think it was Ned Davis's book was called Being Right or Making Money. And he explained how frequently people would just get so hung up on admitting error that they would stay
27:36 Speaker 05 That's right.
27:37 Barry Ritholtz? in the wrong position, the wrong posture, the wrong holdings, rather than admit they were wrong and adjust to whatever the data is.
27:44 Speaker 05 And the trend, you know, Marty Zweig was well-known for quite a bit, but, you know, he coined the term "don't fight the Fed." But he also was known for saying "the trend is your friend." And so staying in gear requires constant thinking and rethinking. In fact, I always use as an example of the perils of the year-end price target. If a strategist at the beginning of 1987 basically said "the market's going to close pretty flat," relative to where it ended in 1986, by the end of the year, they were right from a point to point.
28:20 Barry Ritholtz? However.
28:21 Speaker 05 To suggest that the market was just boring and flat all year.
28:26 Barry Ritholtz? There was that little hiccup in October.
28:28 Speaker 05 Yeah, it was just a tiny little hiccup.
28:29 Barry Ritholtz? September?
28:30 Speaker 05 That was September 19th.
28:31 Barry Ritholtz? Yeah, it was September.
28:31 Speaker 05 No, October 19th.
28:32 Barry Ritholtz? Uh huh.
28:33 Speaker 05 October 19th. But there were, you know, there were warning signs. And here, can I tell you another funny?
28:37 Barry Ritholtz? Sure.
28:37 Speaker 05 Uh, early story. So I started in, uh, the summer of 86. Um, and as, and we were, Marty's side of the business, which was mutual funds, which was the Zweig-Domena hedge fund, which is still ongoing, under the leadership of Joe Domena. Uh, we would be generically thought of as market timers. We were tactical asset allocators on the avatar institutional side, much more traditional market timing on the Zweig side, particularly the hedge fund. And coming into 87, we were, uh, over the cross of strategies, cross strategies, were essentially fully invested, but started to get much more pessimistic about the market in August.
29:21 Barry Ritholtz? You had a huge run up.
29:22 Speaker 05 Huge run up until August.
29:24 Barry Ritholtz? Was it like 30, 40%?
29:26 Speaker 05 I think it was more than 40.
29:28 Barry Ritholtz? Really?
29:28 Speaker 05 And so we started to adjust allocations down, more extreme on the hedge fund side, where Marty went, I think to, essentially a net short, uh, position.
29:39 Barry Ritholtz? And famously discussed it on Rukeyser.
29:42 Speaker 05 The Friday night before the crash, he was on, you can YouTube it now.
29:47 Barry Ritholtz? Yep, yep.
29:48 Speaker 05 And, uh, Lou asked him, or, or made a comment. He said, Marty, you seem, uh, particularly, uh, bearish. And, and Marty was seen as this perma bear.
30:00 Barry Ritholtz? Oh, really?
30:01 Speaker 05 But he wasn't.
30:02 Barry Ritholtz? I know, I don't think of him in that way.
30:03 Speaker 05 He always was a nervous, he always had a little bit of that, that angst and that humbleness. So he would at times be nervous when his view on the market was very bullish. Um, but, uh, so then Lou concluded the question with, do you think we have a bear market ahead of us? And, uh, Marty said, well. No, I think it's more likely to be a crash.
30:27 Barry Ritholtz? That was Friday night.
30:28 Speaker 05 Pretty much it could happen any day. And then he not only said that, but then he laid out, and I think it could be really ugly. But then I think we, we immediately rally off the low, but then we probably retest the low before we take off again. So here I am, less than a year in the business. We had gone from being almost fully invested in equities down to, I don't know, 20 or 25% invested in equities right into, right before the crash. So the little voice in my head is thinking, what's the big deal? Why is everybody freaking out? You just figure out before the crash that there's going to be a crash. You move money out.
31:08 Barry Ritholtz? Right.
31:08 Speaker 05 And then you take advantage of cheaper price. You put it back in.
31:12 Barry Ritholtz? Easy peasy.
31:13 Speaker 05 Right, right. Little did I know.
31:14 Barry Ritholtz? And to just reflect how accurate Zwig was, Monday down 22%, a rally that failed the next day. You didn't quite get back down to the same lows.
31:26 Speaker 05 You didn't fully retest, but it was pretty ugly again.
31:29 Barry Ritholtz? 22% in a day is kinda excessive.
31:32 Speaker 05 23%.
31:32 Barry Ritholtz? 22.8.
31:34 Speaker 05 Okay, all right, I'm rounding. Okay, yeah.
31:36 Barry Ritholtz? And, um, and double check those numbers, I could be wrong. But, you know, portfolio insurance was a big part of that, probably made what was a 10% correction more than double. So maybe that's why you didn't retest. And then it was off to the races, back to break even for the year.
31:53 Speaker 05 And, and we had started buying after the, after the crash. So ended the year with just off the charts performance. And again, you know, naive young me is thinking, I don't know why everybody's freaking out so much.
32:06 Barry Ritholtz? Why are these people talking about how difficult this is? So the obvious question, how significant was Marty to shaping your framework for understanding markets?
32:16 Speaker 05 Oh, extraordinarily impactful because I, I think the thing that resonated with me the most, and you wrote about it in your book, and it's the likes of the Sir John Templeton quote about bull markets are born in pessimism, they grow in skepticism, mature in optimism, die in euphoria. I think that's such a brilliant way to describe a market. Market cycle in part because the only terms used in there have to do with emotions.
32:38 Barry Ritholtz? Exactly.
32:38 Speaker 05 There's nothing in that line about market cycles that has anything to do with what we all obsess about on a day to day basis monetary policy fiscal policy what the next inflation report is going to be even earnings and valuation and Marty understood that too and so much of the work that he did was steeped in that sentiment analysis.
32:57 Barry Ritholtz? I love that you brought that up because I so I took the technical analysis training course with Ralph Alcompora and I don't really think of myself as a technician but I certainly wouldn't buy anything without looking at a chart.
33:12 Speaker 05 Right, it has to be a component.
33:13 Barry Ritholtz? I don't I don't need to see an analyst's research report but I have to at least get a sense of is it trend up is it trend down is this been going sideways for years and um the best technicians I know have always brought in behavioral economics and sentiment before we called it behavioral finance and Marty certainly was one of those people.
33:34 Speaker 05 Absolutely and so my my maybe sort of added focus on the emotional side the sentiment side of the market very much was born out of my time working for Marty and I still think it's extraordinarily important and and one of the the messages we always impart to our investors is ideally you don't figure out the hard way whether there's a wider or narrow gap between your financial risk tolerance and your emotional risk tolerance because those two at times can be completely different and I always describe financial risk tolerance as kind of what's on the proverbial paper.
34:13 Barry Ritholtz? Right, what can you afford to lose.
34:15 Speaker 05 Your time arises in would you need income what is this money for is it for retirement diversification blah blah blah blah blah but if you are going to you know panic and sell everything at the first bear market level declines in your portfolio.
34:30 Speaker 05 Um, you're maybe not as risk tolerant investor as you you thought and I it's it's just the vast majority of mistakes that we see, extreme mistakes, purely driven by emotion.
34:41 Barry Ritholtz? It, you know, there's a line I remember from when I was on a trading desk that I didn't really understand then. But it sums up what you that gap between your financial risk tolerance and your emotional risk tolerance, which is figure out who you are because Wall Street is an expensive place to learn.
34:59 Speaker 05 Exactly.
34:59 Barry Ritholtz? Right? You don't know who you are. You don't know what your emotional pain allowances. You don't wanna panic out. The word capitulation technically means surrender.
35:11 Speaker 05 Mm hmm.
35:11 Barry Ritholtz? So you go to a a March oh nine. That capitulation meant people just couldn't take the pain anymore. Make it stop. Just get me out of everything and that's how bottoms.
35:22 Speaker 05 Can I share the March oh nine?
35:24 Barry Ritholtz? Oh, we were talking about.
35:25 Speaker 05 We were talking about it earlier, but it we didn't have microphones in front of us.
35:28 Barry Ritholtz? That's right.
35:28 Speaker 05 So it was, let's go back to March sixth of two thousand and nine. So I lived in Darien, Connecticut for twenty two years. We raised our kids in Darien. And it's one of the the hotbeds of Wall Street. In fact.
35:45 Barry Ritholtz? Bedroom community, short commute to the city.
35:47 Speaker 05 To the city. Um. Our town made the cover of Business Week in two thousand and eight, the latter part of two thousand and eight, as the town most impacted by the financial crisis in the country. And they did it based on the percentage of the working population that worked either on Wall Street in some capacity or in real estate. And so it was, I was surrounded by Wall Street people. Not a lot of Wall Street women. Um, it was also a town where most of the the women who were raising kids were were stay at home. So I was always steeped in conversation about uh the markets and in the role that I had, I would always get peppered with questions. So my husband and I are at a dinner party in Darien.
36:32 Speaker 05 It's toward the end. Dinner and dessert had served, maybe about a quarter of the people had left, a smaller crowd just sitting around chatting and the host of the party, who was at that time a thirty plus year veteran of Wall Street, said. Uh, Lizanne, I must say, I don't envy you right now. And he was a bit dramatic and he kind of paused for effect. And I said, oh, what do you mean? And he said, well, I really think that there's no chance that the stock market ever gets to another high. I think there's a decent chance that retail investors will never buy again.
37:06 Barry Ritholtz? Wait, never, never, just done.
37:08 Speaker 05 Which makes me question the viability of a company like Schwab. And so I don't even remember what I said. I think I did some generic version. Well, I beg to differ. But I didn't, I was also ready to leave, you know, I like a nine handle on my bedtime. So if it's 11:30, I'm like, okay, chop, chop. So I just, I wanted to end the night. We get in the car unprompted. And I haven't had to embellish a story at all. Before my husband puts the key in the car, he looked to me, he said, did you hear it? And I said, the bell ringing?
37:44 Barry Ritholtz? Yep.
37:44 Speaker 05 He said, I knew you were thinking that. So I called my friend the next morning and I said, I am working on a report and all of my research reports, written research reports, I use rock song titles. I'm a rock chick from way back. So I said, I am working on a report that I want to title, Here Comes the Sun. Can I share the anecdote?
38:04 Barry Ritholtz? No name, just.
38:05 Speaker 05 No name. I said, I'm not going to mention name. He said, sure, I think you're going to regret it. Every time I see him, he does like the fist to the forehead, like, oh, my gosh. And that was when the last person is standing has gone down. That is, and I think that's interesting. What's interesting about sentiment is we know sentiment at extremes serves as a contrarian indicator.
38:29 Barry Ritholtz? Right. Most of the time you could pretty much ignore that middle range.
38:32 Speaker 05 Without anything resembling precise timing. That said, as we all learned in the late 1990s, extremely optimistic sentiment can last for a really long time. You know, Greenspan made his irrational exuberance comment in 96.
38:46 Barry Ritholtz? December 96.
38:46 Speaker 05 And it wasn't until, you know, three plus years later that the market topped out.
38:50 Barry Ritholtz? March 2000, almost four years.
38:51 Speaker 05 That said, when sentiment gets to such an extreme of despair, it's not a precise contrarian timing, but there's a narrower window.
39:01 Barry Ritholtz? Pay attention.
39:02 Speaker 05 Yes, pay more attention to extremes of despair. Then you do extremes of enthusiasm because the latter can last a long time.
39:10 Barry Ritholtz? Tops are a process.
39:12 Speaker 05 Yes.
39:12 Barry Ritholtz? Bottoms are a moment.
39:13 Speaker 05 Exactly.
39:14 Barry Ritholtz? And you know, there are all these old trader cliches and stuff, but they become cliches for a reason.
39:21 Speaker 05 For a reason, absolutely.
39:22 Barry Ritholtz? And you know, we all experience the world in a very narrow window of, there's eight billion people on the planet. Our experiences are maybe a tenth of a percent of what the rest of the world is experiencing. And so we tend to extrapolate out to the rest of the world. But very often what's happening in the markets is not reflecting your personal experience. But after you've lived through enough cycles, you start to be able to hear those sort of things.
39:55 Speaker 05 I had.
39:55 Barry Ritholtz? That was a pure death of equities business we call, cover from the late seventies and a year or two later, that was it. It was the next thousand percent rally.
40:05 Speaker 05 Secular market.
40:06 Barry Ritholtz? Yeah, absolutely. Amazing story.
40:08 Speaker 05 I have one other anecdote that's an interesting one to think about how emotions come into play. Was out in Silicon Valley area, maybe about a year ago, a little less than a year ago, and heard from a client that he had finally given in to his financial consultant's suggestion that he trimmed just back about 10% of his Nvidia holdings. He was an ex-employee, had a lot, just, you know, diversification.
40:32 Barry Ritholtz? Right. We're going to leave some money on the table in order to reduce your drawdowns and volatility.
40:37 Speaker 05 He ended up splitting the difference. He didn't want to trim any, he trimmed 5% and then the stock went up by 20 some odd percent in the short term. And he, he was mad at the financial consultant that the stock had gone up and to his, our financial consultant's credit said, would you really be happier if the 95% you still own went down 20%?
40:59 Barry Ritholtz? Listen, in the beginning of this year Nvidia lost a third of its value.
41:03 Speaker 05 That, they, he was almost more, and to his credit, he said, you know what, that's the way I should think about it. Was more concerned about the top tick, the bottom tick.
41:12 Barry Ritholtz? Right.
41:12 Speaker 05 I trimmed it, wasn't I brilliant because then the stock went down 20%? So it, our emotions play tricks on us in a lot of different directions.
41:21 Barry Ritholtz? You, you brought up my book, I try not to talk about it on the show, but. Um, the regret minimization chapter is all about your role as an individual investor is not to outperform the market or top tick or bottom tick stocks. It's, hey, how can you avoid making decisions that you're gonna say 10 years later, what an idiot I was? Just, just as Charlie Munger said, what can you do to be less stupid? And if, you know, we see these portfolios that started out as a million or $2 million, but through either smarts or good luck or some combination, they had a big slug of Nvidia 10 years ago, and now they have a $20 million portfolio, 18 million of which is Nvidia.
42:06 Barry Ritholtz? Hey, do you really want to ride this up and down? You've won 20. Think about what $20 million in long-term investing does for you. Do you really want to ride this down when it takes one of its regular drawdowns? And what I want to say, it gave up about a trillion dollars in market cap this year before recovering.
42:27 Speaker 05 But can I, can I say something else? Not, and I'm not an analyst, I don't cover Nvidia. But the whole focus, the uber focus on the magnificent seven, let's just use that as an example of a cohort. So the, we're dealing with cap weighted indexes in the case of the S and P and the NASDAQ. And I think one of the messages we impart to individual investors is, don't feel like you have to have the same concentration as what's embedded in these cap weighted indexes. That's an institutional problem. If you're benchmarked against the S and P on a quarterly basis, you are at the mercy of the construction of that index. But as an example of how I, I describe this, Nvidia is the best performing stock within the MAG7 year to date, but it's the 47th best performing stock in the S and P 500.
43:11 Speaker 05 It's the number one contributor to S and P gains by virtue of the multiplier of the cap size. So there's 46 stocks in the S and P that about, that are outperforming Nvidia this year. Nvidia is, I think, ranked number 630 something in the NASDAQ.
43:31 Speaker 05 Meaning there's 630 some odd stocks within the NASDAQ that are outperforming the best performing Mag 7. So it's the concentration, it's the contribution that sometimes gets conflated with the performance.
43:45 Barry Ritholtz? I have a buddy who's a technician who looks at a ratio of the market cap S and P versus the equal weight S and P. And what we've been seeing this year is the equal weight, um, I'm trying to remember where we are now. I haven't looked at it recently, but when it's going up, it's telling you the big caps are faltering. And when the ratio is going down, it's telling you the big caps are doing well, unless I'm, I'm doing that backwards. It depends on, uh, which one is the numerator, which one is the denominator. But clearly the outsized weight market cap wise is, is Nvidia number one or two behind Microsoft or Apple?
44:20 Speaker 05 It's number one right now, but it's been, you know, Meta and Alphabet have actually been kind of battling, but, and then also Microsoft, those are the four of the Mag 7 that are outperforming the S and P year to date. The other three are underperforming. And in fact, a few days ago, because I track this on a daily basis, Apple was down, I think 7% year to date. That was its worst year to date performance. And it was the 503rd ranked contributor to the S and P. So the multiplier of cap size works in the other direction.
44:52 Barry Ritholtz? Sure.
44:52 Speaker 05 If you're an underperformer as well. And a lot of people say, well, what do you mean 503? The S and P has 500 stocks.
44:57 Barry Ritholtz? A and B shares.
44:58 Speaker 05 But right.
44:58 Barry Ritholtz? With Google, Berkshire, you have a few big companies like that.
45:01 Speaker 05 Exactly. So, um.
45:02 Barry Ritholtz? That's a great trivia question. How many company, how many stocks?
45:04 Speaker 05 How many stocks are in the S and P 500?
45:06 Barry Ritholtz? And it's a little more.
45:06 Speaker 05 And there's also not 2000 in the Russell 2000.
45:08 Barry Ritholtz? Or the Wilshire 5000, it's like 3,400.
45:11 Speaker 05 Well, yeah, the Wilshire 5000 used to be about 8,000 stocks. Um, and now there's just fewer stocks that are publicly traded.
45:17 Barry Ritholtz? Yep, absolutely. Coming up, we continue our conversation with Lizanne Saunders, market strategist for Schwab, discussing the current environment. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.
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47:13 Barry Ritholtz? I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Lizanne Saunders. She is the Chief Market Strategist at Schwab, helping to oversee $11 trillion and change in client assets. So I went back and looked at my notes. The last time we had a conversation like this was spring of 2024. It was six months before the election. I don't think the election surprised many people. It sort of felt like that was inevitable. Maybe that's a little bit of hindsight bias. How has this year played out since January 20th relative to expectations?
47:55 Speaker 05 Well, you know, let's focus on not so much the beginning of the year, but The setup going into April 2nd, I think that was a pivotal point because we knew tariffs were coming, but I think there was complacency as to what the announcement would be on April 2nd. An assumption that, okay, 10% across-the-board tariffs, it's kind of built-in to expectations.
48:16 Barry Ritholtz? You call complacency, I call it a failure of imagination. Because afterwards-
48:21 Speaker 05 A failure to imagine the Cheesecake Factory menu being held up and reciprocal tariffs of a massive size.
48:28 Barry Ritholtz? Right.
48:29 Speaker 05 Yeah.
48:29 Barry Ritholtz? Right, because you think about it, he talked about tariffs, he's, I called himself Tariff Man, it's the most beautiful in the dictionary. None of us imagined that he would just overturn the order.
48:40 Speaker 05 And that reciprocity wasn't about tariffs that other countries had as part of their policy, but reciprocity relative to trade deficits. And the confusion that that brought about. When you think about, there are many countries, particularly smaller-
48:55 Barry Ritholtz? Vietnam is the classic example.
48:57 Speaker 05 But also, you know, the Madagascar and Bangladesh.
48:59 Barry Ritholtz? Right.
49:00 Speaker 05 We're never going to have a trade surplus. They can't afford to buy what they're teeny. And in the case of, you know, a place like Madagascar, they produce most of the vanilla in the world.
49:10 Barry Ritholtz? Uh huh.
49:10 Speaker 05 Uh, that gives them literally and figuratively an industry. And they can't afford to buy what we export, which is much more value-add. So I think that was a big surprise factor.
49:21 Barry Ritholtz? A math error, it's effectively a conceptual math error.
49:24 Speaker 05 Yeah, and of course, running trade deficits, the other side of that is a capital account surplus. So we export dollars into the rest of the world and those dollars have to be put to work and they get put in treasuries and equities. And so I think that became a significant concern. I also have been really shocked, Barry, at how the general public doesn't understand literally who pays the tariffs.
49:53 Barry Ritholtz? It's a VAT tax, it's a value-added tax on consumption.
49:56 Speaker 05 But the first time I decided, I was speaking to an audience- In Naples, Florida, in the spring, that well-to-do audience, so assuming they have some investment expertise, but we're not, we're not deep in the import-export business. And I decided, let me just lay out the actual definition of tariffs. I said, notwithstanding the shorthanded headlines of tariffs on China, tariffs on Mexico, fill in the blank, tariffs are paid by the US company importing the goods. They're not paid by the targeted country. It is not the case that, as I've heard from friends who didn't understand how this worked, that in order for China to export goods into the United States, China has to pay a tariff to the United States. Barry,
50:37 Speaker 05 do you know how many people came up to me after that event and said, I had no idea? And that's what's a little frustrating, because there's still that shorthand. And at times, when there are comments made by the administration that, you know, China, again, fill in the blank of the country, paying us more in tariffs, it's the US company, it's a tax on US companies. Now, a valid debate is who ultimately bears the cost? And is it the exporters that will lower their price to offset the tariff that the US company has to pay? Very little indication that that is happening. And then, of course, it's, do companies eat it in their profit margins, or do they pass it on to the consumers?
51:17 Barry Ritholtz? But either way, either companies are going to have lower profits, which means the stock market could support a lower PE multiple, or there's only so many dollars, it's finite.
51:28 Speaker 05 Right.
51:28 Barry Ritholtz? If, if they're, so what we saw, we saw this is taking place in three steps. In anticipation of the tariffs going into effect, and especially with the 90-day pause on April...
51:39 Speaker 05 Well, so that was the thing that happened.
51:41 Barry Ritholtz? There's a ton of excess import, inventory build.
51:43 Speaker 05 In one week, from April 2nd to the intraday low on April 9th, there was sort of a complete about phase. So what none of us can do is try to gauge what the next social media post is going to be.
51:57 Barry Ritholtz? Right.
51:57 Speaker 05 There's been so many fits and starts from a tariff perspective, whether it's delays, tariffs coming down, exceptions. This has been an elongated process. It was, certainly wasn't a moment-in-time kind of thing. But what we can analyze, especially as a strategist, are the setups. So we already talked about the setup going into April 2nd. Well, the setup... shifted very quickly. So you went from complacent sentiment to despairing sentiment.
52:26 Barry Ritholtz? You had a VIX in the low teens that spiked up to thirty. And I want, on the eighth, I wanted to buy and I'm like, I have no idea what the hell the next tweet is gonna be. Can I really put money in my personal account, put money on at risk that could be destroyed by a tweet?
52:43 Speaker 05 But then, then you had the market technically oversold, breadth had fully washed out. So then you get what was really just incrementally positive news intraday on April ninth and off to the races. But then you had the power of the retail trader and that cohort has become unbelievably power, powerful, representing somewhere in the twenty to twenty-five percent of daily trading volume. And that buy the dip mentality was such a fuel for the market. What concerns me a little bit now is if I, I track a lot of the baskets that track like micro baskets of, of stocks. Goldman has a lot of them. UBS has the meme stock basket. You go back to that intraday low on April ninth and it's baskets like the memes, non-profitable tech, heavily shorted stocks.
53:28 Speaker 05 That is the perfect example of retail traders kind of powering this market higher. And in the heavily shorted piece of that, it's also suggestive maybe of retail traders with a little bit of the stick it to the man, which, which drove the initial meme stock craze back in twenty twenty-one.
53:46 Barry Ritholtz? Gamestop thing.
53:47 Speaker 05 Yeah, and it's, it's alive and well again. And it, it actually has forced institutions in some cases to cover shorts, which has added to the, the fuel. Now, I think as we think about the setup, we're arguably back in a similar pre-April second, a bit of complacency and, um, uh, which maybe means some vulnerability to the extent you get some sort of negative catalyst.
54:10 Barry Ritholtz? So that's where I wanted to go since we're talking about the current environment. It felt like a lot of savvy companies. Loaded up on inventory in that 90-day pause.
54:21 Speaker 05 Front ran the tariffs.
54:22 Barry Ritholtz? Right, exactly. And then they were capable, until that ran down, of not really being affected by tariffs. And then even as the tariffs started to bite, they see, it seemed like they were eating the increase and not passing it along. But that can only go on for so long. And it feels like the next phase is consumers are gonna pick it up.
54:46 Speaker 05 And to your point, Barry, there, there wasn't much of that eating it at the early stages because of that inventory build by front-running the tariffs and building inventories at a low-cost basis. Providing some time flexibility around when to make the decision of eating it and the profit margins are passing it on to the consumers. We're now starting to see attempts to pass on to the consumer. But maybe the more interesting thing to consider right now is so much focus on goods that are impacted by tariffs. What's the rate of inflation in those goods? Trying to gauge the tariff impact on the inflation statistics. But what we're also starting to see is demand destruction and switching on the part of consumers.
55:31 Speaker 05 So I think we have to analyze the impact of tariffs in a parallel fashion, not just gauging what the inflation impact is. And you can do that by separating out goods and services within the goods categories of an inflation metric like CPI. Look at those that are directly impacted by tariffs, not impacted by tariffs. But there's the demand destruction side of things. So we track the weekly consumer spending data. And if you separate that into tariff-impacted categories, that's where you're seeing a compression in that spending.
56:02 Barry Ritholtz? So, to be fair, when you look at the US as a $30, $31 trillion economy, when you look at the value of imported, and by the way, that economy is much more services than goods-oriented. And then you look at the percentage of goods that are imported. It's a trillion or two trillion out of, I, I know it sounds crazy to say, yeah, what's a trillion, but it's a trillion out of thirty plus trillion dollars. So the worst case scenario is it, it takes a quarter or half a point out of GDP, but probably doesn't tip us into a recession. Is that a, a fair way to describe?
56:38 Speaker 05 Yeah, in and of itself, it probably doesn't, but there's, you know, the feedback loop that happens if company, right labor. Where if companies, because they don't have that ability to pass most of it on to consumers, in part because of the demand destruction that I'm talking about, then there's that eating in profit margins. And then does that feed into the labor market side of things? I think that's why the Fed did what it did, the risk, the risk management, the insurance cut to try to stem any weakness in the labor market.
57:06 Barry Ritholtz? So let's talk about those cross currents, since you do both markets and the economy. We've had a softening labor market, at least the past few months, and then the whole, I, I don't know if that re uh statement is precise, but it certainly makes it clear we were too optimistic about the labor market over the past four quarters. Um inflation, sort of residual sticky inflation that hasn't come down to the Fed's 2% target. We can argue about whether that really should be a 3% target, but hold that aside. Yet at the same time, we sort, see corporate profits continue to grow and markets
57:45 Barry Ritholtz? making new all times highs, which that combination, uh expanding profits, all time price highs, tends to be bullish. Historically, how do you navigate all of these positives and negatives?
57:56 Speaker 05 Well, here's one way to, to think about the connectivity between the market and the economy. I, I think it's very circular right now, or maybe chicken and egg. And what does make me hearken back to the late 1990s as a bit of a comp to the current environment is not so much, is it a bubble? There's more there there in the AI world.
58:18 Barry Ritholtz? Lot of revenue, lot of profits.
58:19 Speaker 05 Actual denominator in the valuation equation, which is not the case. Right, not clicks and eyeballs. Um, not every company just adding dot com, you know, to the end of their uh name, but at the wealth effect, and it's chicken and egg. And what makes me think back to the late 1990s is in that 99 blow off into the peak in 2000. Whether it was valuation metrics like the Buffett model, which looks at total market cap of all US stocks as a share of total GDP.
58:49 Barry Ritholtz? Which is at all time highs now.
58:51 Speaker 05 And way higher than it was back at the peak in 99 or 2000 at the time. Households exposure to equities as a share of their financial assets. Well at an all time high, significantly higher. So if we remember, when the market topped out in March of 2000, and then we started what was a two and a half year bear market, we ended up getting a recession declared in 2001. It was a very mild recession. It was one of the proof points which for what I always say drives me crazy that people think of recession as traditionally or classically defined as two quarters in a row of GDP. That's never been the definition of recession.
59:28 Barry Ritholtz? That's a pet peeve of mine as well.
59:30 Speaker 05 It drives me crazy. And in fact, oh one, with the benefit of revisions, wasn't two quarters in a row of negative GDP.
59:37 Barry Ritholtz? Same thing in 2022, people were talking about it. The revision.
59:41 Speaker 05 The revision took out that one quarter.
59:44 Barry Ritholtz? Plus, when you have a spike in inflation, it's not that the economy is contracting, it's that we back out price increases. The economy is so hot that inflation makes it look negative.
59:56 Speaker 05 Right.
59:56 Barry Ritholtz? It's not, it's not a contraction, it's just a price problem.
59:59 Speaker 05 But that oh one recession was actually very mild.
1:00:02 Barry Ritholtz? Began in March, I think, and ended in October.
1:00:05 Speaker 05 Ended in October. Short, it was mild. There was not really a financial system crisis. It wasn't a credit crunch. I think it was the weakness in the stock market caused the economy to contract because of the wealth effect at the time.
1:00:20 Barry Ritholtz? I'm gonna take it just a step further. I have vivid recollections of speaking to people, speaking to clients or other people's clients in 96, 97, 98, 99, who had been in the market for 15, 20 years. Hey, we want to trade up to an ISA house. Hey, we want to buy a beach house, a lake house, a vacation property. And the person said, I'm, I'm not sure if the market's going to go higher from here, but I want to pull half a million out of my account and buy real estate. Hey, you're gonna have that house for the next 25, 30 years. Even if the market keeps going higher, who cares? You're sitting on such profits. Why not?
1:01:01 Barry Ritholtz? And so I kinda got a sense that it wasn't so much the wealth effect as people had already done the big buys before the market crashed, which tends to freeze people in place. So I saw a lot of rotation out of equities just because people were sitting on, look, from 82 to 2000, the Dow gained a thousand percent. People were taking a little of the house money off the table and letting the rest ride. And then the dot com implosion, I wanna say 82, 83% peaked a trough on NASDAQ, on the queues.
1:01:40 Speaker 05 Uh, yeah. 57% on the S and P.
1:01:43 Barry Ritholtz? And the Dow held up the best because it was least exposed back then. That was before Microsoft and Intel.
1:01:50 Speaker 05 And price weighted, not cap weighted.
1:01:51 Barry Ritholtz? Right, that's right. So.
1:01:53 Speaker 05 So I just think we, and again, it's a bit circular in that, you know, if and when we get another bear market, we essentially had one this year. Just missed it on the S and P at the index level. But here's another set of statistics. The average max, the average member maximum drawdown for the S and P year to date is 24%. The average member has had a bear market. The average member within the NASDAQ's maximum drawdown is 47%.
1:02:25 Barry Ritholtz? Wow.
1:02:26 Speaker 05 Now, you want.
1:02:27 Barry Ritholtz? Cap weighted?
1:02:29 Speaker 05 Well, the average member, just each individual member.
1:02:32 Barry Ritholtz? So not cap weighted?
1:02:33 Speaker 05 No, because it's individual members. You just track what each member maximum drawdown was at any point and then take an average of that. But here's the maybe more interesting one. In an environment since the April 9th intraday low, we haven't had much of any kind of pullback in either the S and P or the NASDAQ. But just since that low, in an environment where the S and P hasn't even had a 2% pullback, the average member within the S and P since the closing low on April 8th has had a 14% maximum drawdown and within the NASDAQ has had a 32% maximum drawdown. So there's a lot of rotation and churn under the surface, which you don't pick up if you're only focused on the index level, which has that cap bias to it.
1:03:15 Barry Ritholtz? Hmm, that's amazing. So last question before I get to my favorites. We're talking about a lot of things that are in the headlines. What do you think investors are not thinking about or talking about? But perhaps should be what topics, assets, data points are getting overlooked?
1:03:34 Speaker 05 There was one I thought about this morning and it's not so much what people aren't talking about. So I'm going to answer in a different way. It's what I hear a lot of people talking about that isn't quite the right way to think about it. And that is the cash on the sidelines argument.
1:03:49 Barry Ritholtz? So Zweig hated that and I'm not a fan either.
1:03:52 Speaker 05 But it often the specificity around that has to do with the amount of money in money market.
1:03:57 Barry Ritholtz? Seven point something trillion?
1:03:59 Speaker 05 Seven trillion and change. And that that is sitting there as either if not imminent, but ample fuel that if that money decides to repatriate from money markets into the equity market. Boy, we go off to the races.
1:04:14 Barry Ritholtz? Didn't that money mostly come from bonds?
1:04:16 Speaker 05 It did.
1:04:16 Barry Ritholtz? You're getting such low yielding bonds. So my
1:04:19 Speaker 05 I think a lot of it's sticky.
1:04:20 Barry Ritholtz? My Schwab money market account last summer. So we bought a house, a beach property in February. Last summer I was getting like five, three, five, two in the Schwab. What is it? Snacks? Why don't you remember the symbol? And like, why do I need to mess around with 10 or 20 year bonds when I'm getting much better?
1:04:39 Speaker 05 But here's the other angle to that. If you think of $7 trillion as some massive fuel for the market, you need to look at it as a ratio relative to the total
1:04:51 Barry Ritholtz? Right.
1:04:51 Speaker 05 market capitalization.
1:04:53 Barry Ritholtz? It's gone up less than the stock market has.
1:04:55 Speaker 05 It's only 12%. The all time low in the history that we have for that data is 11%. To put that in context, in 08 and 09, when money was flying into money markets because it was fleeing the equity market. At the peak, money market assets relative to the size of the stock market was more than 60%.
1:05:18 Barry Ritholtz? Huh, that's huge.
1:05:20 Speaker 05 Now we're only at about 12%. So the math is such that even if all $7 trillion was to leave en masse and go into the equity market. As a fuel at 12% of total market cap versus say, you know, 63% of total market cap in '09, that's a very different, not to mention, back to our initial point, I think a lot of that money is sticky. That was money that was forced out the risk spectrum into other categories within the fixed income market in order to pick up yield when there was none to be had. So I don't think we should consider that some sidelines cash that is just itching to find its way back into the riskier asset classes.
1:06:01 Barry Ritholtz? Someone once debunked the cash on the sideline argument, and it might have even been Marty Zweig in Winning on Wall Street, by explaining it this way, "Hey, I'm gonna buy a million dollars worth of stock. It means I have a million dollars worth of cash, but no stock. I buy a million of the SPY. Now I have the SPY, and they have a million of cash."
1:06:24 Speaker 05 For every buyer, there's a seller.
1:06:25 Barry Ritholtz? There's no cash on the sideline. It just changes hands. It's the same dollar amount. So it's been one of those things that has persisted forever.
1:06:33 Speaker 05 And also, the more buyers than sellers. No, no, no, no.
1:06:37 Barry Ritholtz? So, you are tagging all my favorite pet peeves.
1:06:41 Speaker 05 There's maybe more enthusiasm on the buy side versus the enthusiasm, but there's no more buyers and sellers or vice versa. For every buyer, there's a seller.
1:06:49 Barry Ritholtz? My head trader used to say, "There are more buyers than sellers at this level, and now you go up to the next price level where there are a matching number of buyers and sellers, and the price stabilizes." If a price is going up, okay, at that particular dot, at 2755, there may be more buyers and stock for sale, but at 2775, that's how you end up with price stability. So, yeah, more buyers and sellers. No, no, they're an equal amount of buyers and sellers. That's how, the other line I love has been, "Trade takes place where there's a disagreement about value, but an agreement on price."
1:07:27 Barry Ritholtz? And that seems to really
1:07:28 Speaker 05 Yeah.
1:07:28 Barry Ritholtz? Explain that. All right.
1:07:30 Speaker 05 I like that one.
1:07:30 Barry Ritholtz? I have to get you out to to catch your plane. So I only have you for a limited amount of time. Let's let's speed through our favorite questions, starting with, tell us about your mentors who have helped shape your career. I'm pretty sure I know the two.
1:07:45 Speaker 05 Shocker, Marty Zweig.
1:07:47 Barry Ritholtz? Yeah.
1:07:47 Speaker 05 Chuck Schwab.
1:07:48 Barry Ritholtz? Okay.
1:07:49 Speaker 05 And in the world of
1:07:49 Barry Ritholtz? By the way, not not too shabby mentors, right?
1:07:52 Speaker 05 Not too shabby mentors, yeah. Boy, was I lucky. And I will say, in the world of media, another name we've already touched on, Louis Rukaiser. One of the best pieces of advice he gave me was was when I was on the show for the first time as a guest. And he was saying hello to me for the first time, welcomed me on to the show. This was off camera. And he asked me whether my parents were still alive and whether they were finance people. And I said, nope, far from it. He said, okay, when you come out here and do the interview with me, get them to understand what you're talking about. And that was such a a moment of, okay, get people to understand what you're talking about.
1:08:27 Barry Ritholtz? That's so funny you say that. My mom was a real estate agent. My wife is an art teacher. And it's always make them understand it. Don't don't clutter it up with jargon.
1:08:38 Speaker 05 That's right.
1:08:38 Barry Ritholtz? Make it understandable. That's interesting that it was it was Rukais who said that. Let's talk about books. I mentioned Zweig's Winning on Wall Street. What are some of your favorites? What are you reading right now?
1:08:49 Speaker 05 So my favorite, so I'm not reading a book right now. I must say, I don't have a lot of time. I read constantly. I drink from a fire hose of information. But it tends to be, you know, like
1:08:59 Barry Ritholtz? Reports and analyses.
1:09:00 Speaker 05 Reports and deep dive Fed research. And but my favorite book of all time, and it is market related, is Reminiscences of a Stock Operator. Absolute favorite. I I tell young people to buy it all the time. It still resonates today. And
1:09:15 Barry Ritholtz? You substitute AI for railroads and telegraph.
1:09:19 Speaker 05 Exactly.
1:09:19 Barry Ritholtz? It's the same story.
1:09:21 Speaker 05 It's the same, it's the same story. But I am a big podcast listener.
1:09:24 Barry Ritholtz? Uh huh.
1:09:25 Speaker 05 Um, so that's the longer form way, including Masters in Business.
1:09:30 Barry Ritholtz? Well, thank you.
1:09:31 Speaker 05 That I absorb information beyond the traditional drivers that come into my My inbox, literally.
1:09:37 Barry Ritholtz? It's easy when you're traveling, if you're on a plane or a car. I just find it so easy. All right. So you told us what your, what, what other podcasts are you listening to? What are you watching on Hulu or Netflix?
1:09:48 Speaker 05 I, I listen to Masters in Business. Um, I love Grant Williams series of, of podcasts. I love them because they're long form and they're big picture and top down. My, my favorite non-investing podcast is, uh, Smartless. I just love those guys.
1:10:03 Barry Ritholtz? Those guys are great.
1:10:04 Speaker 05 They're great. They're, they're so fun.
1:10:06 Barry Ritholtz? I'm gonna tell you, um, I listened, I've had Michael Lewis on the podcast a dozen times.
1:10:11 Speaker 05 I have, I have met and have interviewed Michael Lewis on stage at Schwab's Impact Conference.
1:10:16 Barry Ritholtz? And the story he told, and I'm not even gonna mention it, the story he told on Smartless about a family tragedy was just.
1:10:24 Speaker 05 It was unbelievable. And what, what his friend said to him, or his therapist said to him, the reason why you're so exhausted after this life's tragedy is in your mind, you're rewriting the future without, without her.
1:10:37 Barry Ritholtz? Right. It's crazy.
1:10:38 Speaker 05 And that was such a, a moment of wow. But yeah, that was one of the most impactful interviews I've heard.
1:10:44 Barry Ritholtz? That, I, that stayed with me for a long time.
1:10:46 Speaker 05 In terms of what I'm watching, well, morning show just started back up again.
1:10:50 Barry Ritholtz? Yeah, I'm looking forward to it.
1:10:51 Speaker 05 So we'll get back into that. And I loved Department Q.
1:10:54 Barry Ritholtz? So did I. That was.
1:10:55 Speaker 05 So good. It was intense.
1:10:56 Barry Ritholtz? It was a little slow, but they really, it really paid off. If you like Department Q, um, there's a movie, I wanna say it's on Netflix, called Black Bag. That's the same sort of espionage thing.
1:11:13 Speaker 05 Yeah.
1:11:13 Barry Ritholtz? And I walked in on my wife watching Killing Eve.
1:11:18 Speaker 05 That was great.
1:11:19 Barry Ritholtz? Which she's like.
1:11:20 Speaker 05 Killing Eve was great.
1:11:21 Barry Ritholtz? Like I'm like.
1:11:22 Speaker 05 Queen's Gambit was great.
1:11:23 Barry Ritholtz? There's, there's been a ton of stuff. We, we just finished The Gilded Age, which is.
1:11:27 Speaker 05 Which that's.
1:11:28 Barry Ritholtz? Feels modern.
1:11:30 Speaker 05 I'm obsessed with that era in New York City. I have every book written about it. I'm just so, so, that is so right up my alley.
1:11:38 Barry Ritholtz? So we watched The Crown, but we never watched Downton Abbey. And people said, oh, you like Gilded Age and The Crown, Downton Abbey is. So that's on my, uh, and during the pandemic, I had never seen a single episode of Mad Men. And that was mind blowing to watch that. That felt like, more like a documentary.
1:11:55 Speaker 05 It's fun to go back and watch some of the old shows.
1:11:58 Barry Ritholtz? Absolutely. All right. Our last two questions will get you out of here on time. A recent college grad is interested in the career in investing or doing market strategy, what sort of advice would you give them?
1:12:09 Speaker 05 Well, the world you live in, and indirectly I live in on the advisor side, that's an incredible growth area in the broader realm of financial services. Independent RAAs, wealth management firms, even the wealth management divisions at the big wirehouse firms, because it's essentially a first-generation business. And so there's a lot of succession planning happening right now. And I think for young investors, that's such a great avenue to go in. More generic advice that I give young people, especially as they embark on the networking and interview part of the process is be way more focused on being interested than being interesting. Don't go in there and say, here's all the fabulous things that I've done, especially
1:12:54 Speaker 05 if that's limited to an undergraduate education. But be interested, ask questions, be engaged, show the enthusiasm that way. You're not bringing something into the mix by virtue of what econ 208 course you took that they think, oh, God, we have to hire this person because we don't know anything about that. So we're bringing, it's be interested.
1:13:14 Barry Ritholtz? Huh, really interesting. And our final question, what do you know about the world of investing today you wish you knew back in the 1980s when you were first getting started?
1:13:25 Speaker 05 It seemed to be a little bit easier to analyze markets in that day using kind of traditional stuff, models. To think now about how much more of an influence there is of geopolitics and macro and how much more complicated an ecosystem, not to mention the channels of information that occur through social media. I kind of wish it was back to what at the time didn't feel terribly simple, but I think then was a little bit more simple and more concrete in terms of what drives markets. I think there's more psychology now with a wider band of what that means and what that represents.
1:14:08 Speaker 05 And it would have been interesting to kind of know that in advance, the little birdie landing on your shoulder saying, here's what, here's what, I don't know if I would have believed that 40 years from that point, I'd still be doing this, but just how much more complex an ecosystem that the markets live in these days.
1:14:27 Barry Ritholtz? Huh, really interesting. Lizanne, as always delightful. Thank you so much for being so generous with your time. Always really, really interesting. We have been speaking with Lizanne Saunders. She is the Chief Investment Strategist at Schwab, helping to oversee $11 trillion in client funds. If you enjoy this conversation, well, check out any of the 564 we've done over the past 11 and a half years. You can find those at YouTube, Spotify, Bloomberg, iTunes, wherever you get your favorite podcasts. Be sure to check out my new book, How Not to Invest: The Ideas, Numbers, and Behavior That Destroy Wealth and How to Avoid Them,
1:15:11 Barry Ritholtz? at your favorite bookstore now. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Alexis Noriega is my video producer. Anna Luke is the podcast producer. Sage Baumann is the head of podcasts here at Bloomberg. Sean Russo is my researcher. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.
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