Market Cycles and Investment Strategy With Charles Schwab's Liz Ann Sonders

Summary

Masters in Business | Market Cycles and Investment Strategy With Charles Schwab's Liz Ann Sonders

Host: Barry Ritholtz
Guest: Liz Ann Sonders, Chief Investment Strategist, Charles Schwab
Date: October 24, 2025

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Episode Overview

In this episode, Barry Ritholtz hosts Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, to discuss her career journey, the evolution of Schwab, market cycles, sentiment, investment strategy, and the changing landscape for investors. The conversation blends a deep dive into market history and personal anecdotes with thoughtful insights into the current environment and guidance for individual investors.

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Key Discussion Points and Insights

Liz Ann Sonders’ Career Trajectory and Early Mentors

• Early Career Path (03:11–05:29)
  • Double-majored in Economics and Political Science at the University of Delaware, followed by an MBA in Finance from Fordham.
  • Career began with broad interest – not set on Wall Street initially.
  • Her first significant job was at Zweig Avatar, mentored by the legendary Marty Zweig.
  • Zweig paid for her MBA and offered a culture of education and growth.
  • Notable Quote:
    "So many things that I learned from Marty, I consider him the first mentor, whether he realized it or not." — Liz Ann Sonders [05:29]

Role of Marty Zweig and Sentiment in Markets

• Learning From Legends (05:29–08:01)

  • Schwab and Zweig Avatar were formative, with Sonders absorbing lessons in both market analysis and sentiment.
  • Zweig’s visibility—famed for being on Wall Street Week and known for rules like “don’t fight the Fed.”

• Market Cycles and Emotional Investing (31:38–34:04)

  • Discusses Sir John Templeton’s quote about cycles being tied to emotion and links to Zweig’s own work.
  • Learning to understand both financial and emotional risk tolerance is critical.
    • "Most mistakes are made due to emotion rather than a misread of market data." — Liz Ann Sonders [33:25]

Transition to Schwab and Scaling Up

• From Zweig to U.S. Trust to Schwab (08:30–10:11)

  • Sonders moved to U.S. Trust for a broader, top-down research opportunity before Schwab’s acquisition created her new role.
  • Schwab shifted from a pure trading platform to its first Chief Investment Strategist role.
  • Notable Quote:
    "Chuck Schwab himself came to New York...and sat with me and said we would like to create this role of chief investment strategist which didn't exist at Schwab before." — Liz Ann Sonders [10:11]

• Schwab by the Numbers (11:27–13:49)

  • $11.23 trillion in client assets, split roughly between self-directed investors and those working with independent advisors; significant workplace services business.
  • Schwab’s trusted brand and deep client loyalty highlighted.
    • "The power of our reputation is really extraordinary." — Liz Ann Sonders [15:23]

The Evolving Investor and "Golden Age" of Investing

• Shift from Self-Directed to Advisor-Led (16:41–17:45)

  • Schwab has seen a massive shift: more investors desire advice and discipline, not just execution platforms.

• Is This the ‘Golden Age’ for Investors? (17:45–20:26)

  • Sonders calls it both “true and false” — those who are disciplined benefit massively, but the rise of retail trading and “buy the dip” strategies are not the same as investing.

    • "Investing is about discipline… strategies like 'get in, get out' are really gambling on moments in time." — Liz Ann Sonders [18:00]
    • Younger traders, born out of the post-pandemic bounce, may not understand full market cycles.

  • Risk of Cohort Experience

    • Many investors, especially younger ones, have only ever experienced bull markets, lacking understanding of cyclical downturns.

Role of a Chief Investment Strategist

• Blending Macro and Markets (23:37–26:31)

  • Sonders focuses on top-down macro analysis, different from bottom-up stock picking.
  • Schwab uniquely blends market and economic analysis in one role; avoids forecasts like year-end price targets to focus on managing through cycles.
    • "Having that overlap in analysis has been a benefit because our investor base are almost all individual investors." — Liz Ann Sonders [24:56]
    • "Chuck [Schwab] not being a believer in the whole year-end price target...was music to my ears." [25:44]

• The Perils of Forecasting (26:31–30:33)

  • Critique of the overemphasis on annual price targets and the tendency for professionals to become married to their views.
  • Anecdote about how Zweig anticipated the ’87 crash, navigating it successfully, and the lessons learned (“easy peasy” only in hindsight).

Sentiment, Market Cycles, and Behavioral Economics

• Role of Sentiment Analysis (31:38–38:32)
  • Behavioral economics and emotion are as central to market outcomes as fundamentals.
    • "There's nothing in that line [Templeton’s quote] about monetary policy, earnings, valuation – just emotion." [32:00]
  • Sonders’s advice: Investors often don’t know their true emotional risk tolerance until they panic in a downturn.
  • Notable story: Dinner party in March 2009, when despair was peaking — using sentiment extremes as a contrarian signal.
    • "I must say I don't envy you right now...I think there's a decent chance that retail investors will never buy again." — Unnamed dinner guest, recounted by Sonders [36:28]
    • "When the last person is standing has gone down, that is...the bell." — Sonders [37:28]
  • "Tops are a process; bottoms are a moment." — Barry Ritholtz [38:32]

Concentration and Index Effects

• Magnificent 7 & Index Construction (41:49–44:39)
  • Warns individuals not to feel pressured to mirror the mega-cap concentration in major indices.
    • "Nvidia is the best performing stock within the Mag 7 year to date, but it's the 47th best performing stock in the S&P 500." — Sonders [42:59]
  • Market-cap weighting vs. equal weighting: The big names dominate headline returns, but many stocks outperform outside the spotlight.

Current Environment: Tariffs, Sentiment, and Market Setup

• Election Year, Tariffs, and Surprises (46:17–52:32)

  • April 2, 2025, was a turning point with unexpected tariff announcements and market complacency being upended.
    • "There was complacency as to what the announcement would be on April 2nd...I think that was a big surprise." — Sonders [46:41]
  • Many investors misunderstand who pays tariffs (it’s US importers, not foreign exporters), often confusing their economic impact.
    • "Tariffs are paid by the US Company importing the goods. They're not paid by the targeted country." — Sonders [48:17]

• Tariffs' Impact on Markets and Consumers (53:07–55:00)

  • Initial buffer through inventory build, but over time, companies start passing increased costs to consumers, causing demand destruction in tariff-affected goods.

• Crosscurrents: Profits vs. Labor Market (55:28–58:21)

  • Labor market has softened, inflation is persistent, but corporate profits and equity markets remain strong.
  • Sonders sees a circular relationship between wealth effect (rising market values) and economic confidence.

Under the Surface: Market Breadth and Rotations

• Many Stocks Are in Their Own Bear Markets (60:16–61:37)
  • Average drawdown for S&P 500 constituents is 24%; for Nasdaq, 47%, despite strong index-level performance.
    • "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..." — Sonders [61:37]

Common Investor Fallacies

• Cash on the Sidelines Myth (61:55–64:22)
  • The oft-cited $7 trillion in money market "sidelines cash" is misunderstood; much of it came from shifting bond allocations, and relative to total market cap it's near historic lows (~12% vs. 60% in '08–'09).
    • "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 market capitalization." — Sonders [63:01]
    • "For every buyer there's a seller. There's no cash on the sideline. It just changes hands." — Barry Ritholtz [64:46]
  • Other misconceptions like “more buyers than sellers” are also debunked.

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Notable Quotes & Memorable Moments

• "The power of our reputation is really extraordinary...Schwab dates back...about 53 years. And, you know, Chuck has written about the history of Schwab and his history." — Liz Ann Sonders [15:23]
• "Investing is about discipline...get in, get out are really gambling on moments in time." — Liz Ann Sonders [18:00]
• "There's a wider spread in how investors are approaching the market...they're kind of at different ends of the spectrum." — Liz Ann Sonders [20:13]
• "I always describe financial risk tolerance as what's on the proverbial paper...but if you're going to panic and sell everything...you're maybe not as risk tolerant as you thought." — Liz Ann Sonders [33:25]
• "Tops are a process; bottoms are a moment." — Barry Ritholtz [38:32]
• "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 market capitalization." — Liz Ann Sonders [63:01]

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Timestamps for Important Segments

• Career path, Marty Zweig mentorship: 03:11–08:01
• Joining and shaping Schwab’s strategy: 08:30–10:47
• Schwab’s business model and scale: 11:27–13:49
• Investor discipline & golden age: 17:45–20:26
• Role and philosophy as chief strategist: 23:37–26:31
• Market cycles, sentiment, behavioral risk: 31:38–38:32
• Market concentration, index dynamics: 41:49–44:39
• Tariffs, economic sentiment, trade effects: 46:17–55:00
• Current market undercurrents & rotations: 60:16–61:37
• Sideline cash and investing fallacies: 61:55–64:22

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Advice for Young Professionals and Investors

• Be Interested, Not Just Interesting
  • Ask questions and show real curiosity in interviews and networking, instead of trying to impress with accomplishments. [70:30]
• Importance of Emotional Awareness
  • Know your true emotional risk tolerance to avoid costly panic in downturns. [34:04]

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Favorite Resources & Recommendations

• Book:
  • Reminiscences of a Stock Operator – Liz Ann’s all-time favorite investing book. [67:10]
• Podcasts:
  • Masters in Business, Grant Williams’s podcasts, and SmartLess, among others. [68:10]

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Conclusion

This conversation offers a masterclass in understanding both the hard numbers and the soft drivers—like sentiment and risk tolerance—that shape market cycles and investor outcomes. Sonders argues that while the tools and platforms have never been better for disciplined investors, emotional pitfalls and market complexity remain, making behavioral discipline more important than ever.

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For anyone seeking an engaging, thought-provoking primer on markets, history, and modern investing challenges, this episode is essential listening.

Transcript

[Barry Ritholtz]

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Bloomberg Audio Studios podcasts Radio.

[Liz Ann Saunders]

News.

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This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

[Barry Ritholtz]

This week on the podcast strap yourself in for another great one. Liz Ann Saunders, 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 Schwaber are doing. I know Liz for almost 25 years. Every time I speak with her it's always great. This is another conversation that is also fabulous. With no further ado, my discussion with Liz Ann Saunders.

[Liz Ann Saunders]

Always great to see you.

[Barry Ritholtz]

I know it's always I always have.

[Liz Ann Saunders]

So much known each other for a long time.

[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 Gabelli?

[Liz Ann Saunders]

No, it was not.

[Barry Ritholtz]

It's now called Gabelli School of Business. Was the career plan always Wall Street?

[Liz Ann Saunders]

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. So doing research on a company meant going to the library, pulling up a microfiche machine, actually cranking the handle and look at newspaper clippings, and was fascinated by Marty Zweig, the co founder, and enjoyed the interview process. Liked the people with whom I met and I don't know, a little voice just said, this seems to make sense.

[Barry Ritholtz]

I recall reading a book Marty Zweig wrote, I wanna say, in the late 90s when I was on a trading desk winning on Wall Street.

[Liz Ann Saunders]

Late 80s.

[Podcast Producer / Announcer]

Late 80s.

[Barry Ritholtz]

Well, I got his book when I started around the time of the Netscape ipo.

[Liz Ann Saunders]

He did newer versions, he did updated.

[Barry Ritholtz]

Versions, but so whatever that version was in 96, 97, and I vividly recall that. How did you get the gig with Marty Zweig? What was that like?

[Liz Ann Saunders]

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 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 not.

[Barry Ritholtz]

People, by the way, people don't realize, especially the generation that came of age in 2000, what a legend he was.

[Liz Ann Saunders]

Unbelievable legend.

[Barry Ritholtz]

I think at one point in time, he owned the. The most expensive apartment in the United States. Is that true?

[Liz Ann Saunders]

Yes. It was the top three floors of the Pierre, which is now owned by the Commerce Secretary.

[Barry Ritholtz]

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 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.

[Liz Ann Saunders]

He was one of the originals on the original Wall Street Week.

[Barry Ritholtz]

Yep. I mean, back in the day when all of financial media was an hour of television a week, not even.

[Liz Ann Saunders]

It was a half hour 8:30pm Friday Nights on PBS, produced by Maryland Public Television. That's right. And Marty was not only one of the original panelists, he was, I think, the original elf, as Lou used to describe them.

[Barry Ritholtz]

The people came back on regulars.

[Liz Ann Saunders]

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 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 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 really brilliant 30 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. And so I started watching it before I joined the business, before I started at Zweig Avatar, and then I joined the show in 1997, which was surreal.

[Barry Ritholtz]

So you were not that far out of school when you started?

[Liz Ann Saunders]

Well, I was right. It was 11 years. So since you and I have talked about our first experience together, which was on tv.

[Barry Ritholtz]

It was my first TV appearance and.

[Liz Ann Saunders]

I went on the show as a special guest. So I remember getting the little pink slip from the receptionist that told you who had called. There was a voicemail at that time.

[Barry Ritholtz]

That said Louis Rukeyser called.

[Liz Ann Saunders]

Rich Dubroff, 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.

[Barry Ritholtz]

Oh, really?

[Liz Ann Saunders]

Yeah. Until I. And it was legit. And I went on as a guest. And then shortly after that they asked me to become a regular panelist and it was a thrill.

[Barry Ritholtz]

So you were Zweig for a number of years. How'd you end up? 13 years. Wow, that's a long time.

[Liz Ann Saunders]

86 to 99.

[Barry Ritholtz]

How did you end up at U.S. trust?

[Liz Ann Saunders]

So that was kind of funny. So I was on the Avatar side of the Zweig 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 as.

[Barry Ritholtz]

Opposed to bottom up stuff.

[Liz Ann Saunders]

As a bottom I just the inner voice said you don't really love this that much. And there wasn't really an opportunity for that. It wasn't that I was pigeonholed, but it was a growing role as a portfolio manager. So I got recruited over to US Trust to co 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 what means.

[Barry Ritholtz]

Here's the universe. It's 100 of the S&P 500 and.

[Liz Ann Saunders]

We were a concentrated manager only owning no less than 25 typically with a four to five year holding period.

[Barry Ritholtz]

So not a closet indexer. High active share.

[Liz Ann Saunders]

But I also didn't love the pigeonholing aspect of it where the mantra had to be large cap growth. I liked thinking bigger picture and thinking about different parts of the market cycle and what works. So 10 months after I joined U.S. trust, Schwab acquired U.S. trust.

[Barry Ritholtz]

That was 2000.

[Liz Ann Saunders]

That was 2000.

[Barry Ritholtz]

And you've been with Schwab for a.

[Liz Ann Saunders]

Quarter century for it'll be 26 years at the beginning of next year. And 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.

[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.

[Liz Ann Saunders]

Well, that's kind of you to say. Well, I mean they did offer me the role. It had not existed before.

[Barry Ritholtz]

That's a big deal.

[Liz Ann Saunders]

And I said yes, please.

[Barry Ritholtz]

Yeah, absolutely.

[Liz Ann Saunders]

And the rest is 26 years of history.

[Barry Ritholtz]

So. 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 for a 1k. How many trillions of dollars are on.

[Liz Ann Saunders]

That platform 11.23 trillion.

[Barry Ritholtz]

All right, so keep working at it.

[Liz Ann Saunders]

And that is a t. Yeah, yeah. Trillion with about a third of the size of the US economy.

[Barry Ritholtz]

Wow, that's unbelievable. And at the time, what was Schwab in 2000?

[Liz Ann Saunders]

Oh gosh, you know what, it was less than that because I remember getting this little plexiglass. Well no, it was a holder for sticky notes and it had a star on it and it said 1 trillion incline essence. But that was after the position of me.

[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.

[Liz Ann Saunders]

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 raas that 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 and I'm totally using rounded numbers here but of the ten of the eleven and a quarter trillion is about evenly divided between individual investors on our platform.

[Barry Ritholtz]

Self directed.

[Liz Ann Saunders]

Self directed and well, not always. Now we have a whole wealth management arm that all feeds not just to the individual investor side of what we do, but to swabbling the real world. 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 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.

[Barry Ritholtz]

That's really interesting.

[Liz Ann Saunders]

We would consider the advisor our client but we're providing a platform for them you guys to advise for the most part individual investors.

[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're 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. 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. 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, maybe a little bit of JPMorgan 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. Key bank. 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 an issue.

[Liz Ann Saunders]

The power of our reputation is really extraordinary. And Schwab dates back, you know, about 53 years.

[Barry Ritholtz]

54 years.

[Liz Ann Saunders]

Yeah, the early 1970s. And you know, Chuck has written about the history of Schwab and his history. His most recent book was called Invested, and it was essentially a memoir of his time in this business.

[Barry Ritholtz]

And when you say Chuck.

[Liz Ann Saunders]

Chuck Schwab himself.

[Barry Ritholtz]

Chuck Schwab, who people used to think wasn't a real guy. No, it's a real guy in the commercials is him.

[Liz Ann Saunders]

Is him.

[Barry Ritholtz]

And he's still up and about. You were telling me he was. He's just won a golf tournament at 88.

[Liz Ann Saunders]

Last year he won the Nantucket Golf Club. That's a member. Member at 87. And he almost won it again this year at 88. So regularly shoots below his age. Still a very active chair of the board. But the culture that he has imbued in Schwab is really second to none. And you know, our sort of corporate, for lack of a better word, tagline, is through client size. And he has fostered this live, eat and breathe. Everything you do has to be from the perspective of clients.

[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. You've witnessed a shift from a lot of self directed investors over to the advisor driven side. What has that process been like at Schwab? Because we're talking about trillions of dollars.

[Liz Ann Saunders]

Not just the advisor side, but 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 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.

[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 answer that?

[Liz Ann Saunders]

Can I say yes?

[Podcast Producer / Announcer]

Yeah.

[Barry Ritholtz]

True.

[Liz Ann Saunders]

Just yes? No, I didn't say true, I said yes.

[Barry Ritholtz]

Yes. Golden age of investing for me.

[Liz Ann Saunders]

Well, I think it's both true and false, depending on how you define golden age of investing. 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 fully agree that those are really gambling on moments in time. You wrote about it brilliantly 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 more equipped now and have more access to information and guidance 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 the ultimate contrarian indicator, but I think the perspective there is one of the very short time horizons. Buy the DIP mentality which to their.

[Barry Ritholtz]

Credit works in a bull market, very painful in a bear market.

[Liz Ann Saunders]

But a lot of the younger retail trader that was born out of the pandemic era, it's not that they have blinders on to the long term or the big picture, but they've been, I guess, so far anyway to your point, properly schooled by virtue of buy the tip has worked. But I'm starting to get some anecdotal evidence that there. I'm not sure that there is a full understanding of what a market cycle actually looks like and that there is downside. So I think there's more bifurcation and there's a wider spread in terms of how investors are approaching the market or how traders are approaching the market. And 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 FOMO, I'm in and buy every dip.

[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 one of the greatest rampaging.

[Liz Ann Saunders]

Bull markets in history was brutal from an economic perspective. But it was five weeks in the.

[Barry Ritholtz]

Case of the market right mid February.

[Liz Ann Saunders]

To March in the case of the.

[Barry Ritholtz]

Recession, although people still didn't believe it throughout that summer, as from the March 2020 lows till the end of the year, I think The S&P 500 was up 69% and people fought it the whole way because their personal experience didn't jive with what they were saying.

[Liz Ann Saunders]

Exactly.

[Barry Ritholtz]

Inequities, which is fascinating. Coming up, we continue our conversation with Liz Ann Saunders 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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[Barry Ritholtz]

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[Barry Ritholtz]

I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Liz Ann Saunders. She is the chief market strategist for Schwab, helping to oversee 11 + 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?

[Liz Ann Saunders]

Well, it's 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.

[Barry Ritholtz]

Top down meaning markets? Economy, yes. Do you look at sectors? Do you look At Fixed Income.

[Liz Ann Saunders]

My colleague and co host on our On 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 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 distinct roles of chief economist and chief investment strategist. And that was always pleasing to me because 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 overlap in analysis has been a benefit 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 a good chunk of your client base, that is a consumer of strategists, work 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, 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, 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 end point to one end point. 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.

[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. 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, that's right, in the wrong position, the wrong posture, the wrong holdings, rather than admit they were wrong and adjust to whatever the danger is.

[Liz Ann Saunders]

And the trend, you know, one of Marty Zweig was well known for quite a. 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, however, to suggest that the market was just boring and flat all year.

[Barry Ritholtz]

There was that little hiccup.

[Liz Ann Saunders]

Yeah, it was just a tiny little September. That was September 19th. No, October 19th. October 19th. But there were, you know, there were warning signs. And here. Can I tell you another funny.

[Barry Ritholtz]

Sure.

[Liz Ann Saunders]

Early story. So I started in the summer of 86 and as. And we were Marty's side of the business, which was mutual funds, which was the Zweig Dimena hedge fund, which is still ongoing under the leadership of Joe Domena. 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 over the cross of strategies across strategies. We're essentially fully invested, but started to get much more pessimistic about the market. In August you had a huge run.

[Barry Ritholtz]

Up, huge run up until August. Was it like 30, 40%?

[Liz Ann Saunders]

It was more than 40, really. 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 position and famously discussed it on Rukeyser the Friday night before the crash. He was on. You can YouTube it now.

[Barry Ritholtz]

Yep, yep.

[Liz Ann Saunders]

And Lou asked him or made a comment, he said, marty, you seem particularly bearish. And Marty was seen as this perma bear. He was just. But he wasn't.

[Barry Ritholtz]

I know. I don't think of him in that way.

[Liz Ann Saunders]

He was always nervous. He always had a little bit of that angst and that's humble. So he would at times be nervous when his view on the market was very bullish. But so then Louis concluded the question with do you think we have a bear market ahead of us? And Marty said, well, no, I think it's more likely to be a crash.

[Barry Ritholtz]

That was Friday night, pretty much.

[Liz Ann Saunders]

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 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 and then you take advantage of cheaper price, you put it back in.

[Barry Ritholtz]

Easy peasy, right?

[Liz Ann Saunders]

Right. Little did I.

[Barry Ritholtz]

And to just reflect how accurate Zweig was Monday, down 22%. A rally that failed the next day, you didn't quite get back down to.

[Liz Ann Saunders]

You didn't fully retest, but it was pretty ugly.

[Barry Ritholtz]

22% in a day is kind of excessive.

[Liz Ann Saunders]

23%.

[Barry Ritholtz]

22,8 if I'm rounding.

[Liz Ann Saunders]

Okay, yes.

[Barry Ritholtz]

And double check those numbers. I could be wrong, but 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.

[Liz Ann Saunders]

And we had started buying after the crash, so ended the year with just off the charts performance. And again, naive young me is thinking, I don't know why everybody's freaking out so much.

[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?

[Liz Ann Saunders]

Wow. Extraordinarily impactful. Because 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 and optimism, die on euphoria. I think that's such a brilliant way to describe a market cycle. In part because the only terms used in there have to do with emotions.

[Barry Ritholtz]

Exactly.

[Liz Ann Saunders]

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.

[Barry Ritholtz]

I love that you brought that up because. So I took the technical analysis training course with Ralph Acumpora and I don't really think of myself as a technician, but I certainly wouldn't buy anything without looking at a chart.

[Liz Ann Saunders]

It has to be a component.

[Barry Ritholtz]

I don't need to see an analyst research report, but I have to at least get a sense of is the trend up, is the trend down? Has this been going sideways for years? And the best technicians I know have always brought in behavioral economics and sentiment before we called it behavioral finance.

[Liz Ann Saunders]

Absolutely.

[Barry Ritholtz]

And Marty certainly was one of those people.

[Liz Ann Saunders]

Absolutely. And so 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 one of 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. Your time arising. Do you need income? What is this money for? Is it for retirement diversification, blah blah, blah, blah, blah. But if you are going to panic and sell everything at the first bear market level declines in your portfolio, you're maybe not as risk tolerant investor as you thought. And it's just the vast majority of mistakes that we see, extreme mistakes purely driven by emotion.

[Barry Ritholtz]

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 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.

[Liz Ann Saunders]

Exactly right.

[Barry Ritholtz]

You don't know who you are. You don't know what your emotional pain allowance is. You don't want to panic out. The word capitulation technically means surrender. So you go to a 3-09 that capitulation meant people just couldn't take the pain anymore. Make it stop. Top. Just get me out of everything. And that's how bottoms.

[Liz Ann Saunders]

Can I share the March 09?

[Barry Ritholtz]

Oh, we were talking about.

[Liz Ann Saunders]

We were talking about it earlier, but we didn't have microphones in front of us. So it was. Let's go back to March 6th of 2009. So I lived in Darien, Connecticut for 22 years. We raised our kids in Darien. And it's one of the hotbeds of Wall Street.

[Barry Ritholtz]

In fact, bedroom community. Short commute to the city.

[Liz Ann Saunders]

Short commute to the city. Our town made the COVID of BusinessWeek in 2008, the latter part of 2008, 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. It was also a town where most of the women who were raising kids were stay at home. So I was always steeped in conversation about 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. It was 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 hosts of the party, who was at that time a 30 plus year veteran of Wall street, said, lisanne, 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.

[Barry Ritholtz]

Never, never, never.

[Liz Ann Saunders]

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 begged to differ. But 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? 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?

[Barry Ritholtz]

No name. Just the anecdote. No name.

[Liz Ann Saunders]

I said, I'm not gonna mention name. He said, sure. I think you're gonna 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 what's interesting about Senem, is we know sentiment at extremes serves as a contrarian indicator.

[Barry Ritholtz]

Right. Most of the time you could pretty.

[Liz Ann Saunders]

Much ignore middle range 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.

[Barry Ritholtz]

Comment in 96, December 96.

[Liz Ann Saunders]

And it wasn't until, you know, three plus years later that the market topped.

[Barry Ritholtz]

Down March 2000, almost four years.

[Liz Ann Saunders]

That said, when sentiment gets to such an extreme of despair, it's not a precise contrarian timing, but there's a narrower window.

[Barry Ritholtz]

Pay attention.

[Liz Ann Saunders]

Yes. Pay more attention to extremes of despair than you do extremes of enthusiasm, because the latter can last a long time.

[Barry Ritholtz]

Tops are a process.

[Liz Ann Saunders]

Yes.

[Barry Ritholtz]

Bottoms are a moment. Bottoms are a moment, absolutely. And you know, there are all these old trader cliches and stuff, but they become cliches for a reason. And you know, we all experience the world in a very narrow window of There's 8 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. That was a pure death of equities business we cover from the late 70s and a year or two later that was it. It was the next thousand percent bull market. Yeah, absolutely amazing story.

[Liz Ann Saunders]

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 suggestion that he trim just back about 10% of his Nvidia holdings. He was an ex employee, had a lot, just diversification.

[Barry Ritholtz]

Right. We're going to leave some money on the table in order to reduce trim drawdowns and volatility.

[Liz Ann Saunders]

He ended up 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 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%.

[Barry Ritholtz]

Listen, in the beginning of this year, Nvidia lost psychology.

[Liz Ann Saunders]

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. I trimmed it. Wasn't I brilliant? Because then the stock went down 20%. So our emotions play tricks on us in a lot of different directions.

[Barry Ritholtz]

You brought up my book. I try not to talk about it on the show. It was great book. 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. 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 I want to say it gave up about a trillion dollars in market cap this year before recovering.

[Liz Ann Saunders]

But can I say something else? 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 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, 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 describe this, Nvidia is the best performing stock within the Mag 7 year to date, but it's the 47th best performing stock in the S&P 500. Wow. 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 are outperforming Nvidia this year. Nvidia is, I think ranked number 630 something in the NASDAQ, meaning there's 630 some odd stocks within the Nasdaq that are outperforming the best performing Mag 7. So it's the contribution that sometimes gets conflated with the performance.

[Barry Ritholtz]

I have a buddy who's a technician who looks at a ratio of, 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. 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 doing that backwards. It depends on which one is the numerator, which one is the denominator. But clearly the outsized weight market cap wise is Nvidia number one or two behind Microsoft.

[Liz Ann Saunders]

Apple, that's number one right now. But it's been, you know, Meta and Alphabet have actually been kind of battling. And then also Microsoft. Those are the four of the Mag seven that are outperforming the S and P year to date. The other three are underperforming. And in fact, a few days ago, because I tracked 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 capsize works in the other direction. If you're an underperformer as well, a lot of people say, well, what do you mean? 503? The S&P has 500 stocks, A& B shares, but.

[Barry Ritholtz]

Right, Berkshire, exactly. So that's a great trivia question. How many company, how many stocks, how.

[Liz Ann Saunders]

Many stocks are in the s and P? 500. And there's also not 2000 in the.

[Barry Ritholtz]

Russell 2000 or the Wilshire 5000. It's like 3430.

[Liz Ann Saunders]

Yeah, the Wilshire 5000 used to be about 8000 stocks and now there's just fewer stocks that are publicly traded.

[Barry Ritholtz]

Absolutely. Coming up, we continue our conversation with Liz Ann Saunders, market strategist for Schwab, discussing the current environment. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

[Akshat Ra]

There are two kinds of people in the world, people who think about climate change. And people who are doing something about it. On the Zero podcast, we talk to both kinds of people. People you've heard of, like Bill Gates.

[Barry Ritholtz]

I'm looking at what the world has.

[Liz Ann Saunders]

To do to get to zero, not using climate as a moral crusade.

[Akshat Ra]

And the creative minds you haven't heard of yet. It is serious stuff, but never doom and gloom. I am Akshat Ra Listen to Xero every Thursday from Bloomberg Podcasts on Apple, Spotify or anywhere else you get your podcasts.

[Barry Ritholtz]

I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Liz Ann 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?

[Liz Ann Saunders]

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 into expectations.

[Barry Ritholtz]

You call it complacency. I call it a failure of imagination.

[Liz Ann Saunders]

Because afterwards, failure to imagine the Cheesecake Factory menu being held up and reciprocal tariffs of a massive size. Right.

[Barry Ritholtz]

Yeah, right. Because you think about it, he talked about tariffs. I called himself Tariff Man. It's the most beautiful in the dictionary. None of us imagined that he would.

[Liz Ann Saunders]

Just overturn the oil 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.

[Barry Ritholtz]

Countries, particularly smaller, Vietnam is the classic.

[Liz Ann Saunders]

Example, but also, you know, the Madagascar and Bangladesh, we're never going to have a trade surplus. They can't afford to buy. Tiny. And in the case of a place like Madagascar, they produce most of the vanilla in the world. 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 fact.

[Barry Ritholtz]

A math error. It's effectively a conceptual math error. Yeah.

[Liz Ann Saunders]

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, here's some paper we print.

[Barry Ritholtz]

Equity, give us stuff.

[Liz Ann Saunders]

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.

[Barry Ritholtz]

It's a VAT tax, it's evaluated tax on consumption.

[Liz Ann Saunders]

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 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 churn 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, 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?

[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. 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.

[Liz Ann Saunders]

Well, so that was the thing that happened.

[Barry Ritholtz]

So there's a ton of excess import inventory.

[Liz Ann Saunders]

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. 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 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.

[Barry Ritholtz]

You had a vix in the low teens that spiked up to 30. And I want, on the 8th, I wanted to buy and I'm like, I have no idea what the hell the next tweet is going to be. Can I really put money in my personal account, put money at risk that could be destroyed by a trade?

[Liz Ann Saunders]

But then you had the market technically oversold, breath had fully washed out. So then you got really just incrementally positive News intraday on April 9 and off to the races. But then you had the power of the retail trader. And that cohort has become unbelievably powerful, representing somewhere in the 20 to 25% 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 track a lot of the baskets that track like micro baskets of stocks, Goldman has a lot of them. UBS has the meme stock basket. You go back to that intraday low on April 9th and it's baskets like the memes, nonprofitable tech, heavily shorted stocks. 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 drove.

[Barry Ritholtz]

The initial meme stock cranes back in 2021 GameStop thing.

[Liz Ann Saunders]

Yeah. And it's alive and well again. It actually has forced institutions in some cases to cover shorts, which has added to the fuel. Now, I think as we think about the setup, we're arguably back in a similar pre 4-2-2, a bit of complacency, which maybe means some vulnerability to the extent you get some sort of negative catalyst.

[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 front, ran the tariffs. Right, exactly. And then they were capable, until that ran down, of not really being affected by tariffs. And then even, even as the tariffs started to bite, 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 going to pay down.

[Liz Ann Saunders]

And to your point, Barry, 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 in the profit margins or 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. 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.

[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 2 trillion out of. I know it sounds crazy to say, yeah, what's a trillion? But it's a trillion out of 30 plus trillion dollars. So the worst case scenario is it takes a quarter or half a point out of gdp, but probably doesn't tip us into a recession. Is that a fair way to describe it?

[Liz Ann Saunders]

Yeah, in and of itself it probably doesn't. But there's, you know, the feedback loop that happens if company, 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.

[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 don't know if that restatement is precise, but it certainly makes it clear we were too optimistic about the labor market over the past four quarters. 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 see corporate profits continue to grow and markets making new all times highs, which that combination expanding profits all time price highs tends to be bullish historically. How do you navigate all of these positives and negatives?

[Liz Ann Saunders]

Well, here's one way to think about the connectivity between the market and the economy. 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.

[Barry Ritholtz]

A lot of revenue, a lot of profits.

[Liz Ann Saunders]

There's an actual denominator in the valuation equation.

[Barry Ritholtz]

Not clicks and eyeballs, right?

[Liz Ann Saunders]

Not clicks and eyeballs, not every company just adding.com to the end of their name. But 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 which is at all time highs 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.

[Barry Ritholtz]

Nber that's a pet peeve of mine as well.

[Liz Ann Saunders]

It drives me crazy and in fact a one with the benefit of revisions wasn't two quarters in a row of negative GDP.

[Barry Ritholtz]

Same thing in 2022 people were talking about it, the revision, the revision took.

[Liz Ann Saunders]

Out that one quarter plus when you.

[Barry Ritholtz]

Have a spike in inflation, it's not that the economy is contracting, it's that we back out Price increases.

[Liz Ann Saunders]

Exactly.

[Barry Ritholtz]

The economy is so high that inflation makes it look negative. It's not a contraction, it's just a price.

[Liz Ann Saunders]

But that.01 recession was actually very mild.

[Barry Ritholtz]

Began in March, I think, and ended in October.

[Liz Ann Saunders]

Ended in October. It was short, it was mild. There was not really a financial system crisis. There 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.

[Barry Ritholtz]

I'm going to 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 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 State. It's like, hey, you're going to 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? And so I kind of got a sense that it wasn't so much the wealth effect as people had already done the big buys before the market crash, which tends to freeze people in place. So I saw a lot of rotation out of equity just because people were sitting on. Look, from 82 to 2000, the Dow gained 1,000%. People were taking a little of the house money off the table and letting the rest ride. And then the.com implosion, I want to say 82, 83% peaked a trough on NASDAQ on the QS, yeah, 57% on.

[Liz Ann Saunders]

The S and P. And the Dow.

[Barry Ritholtz]

Held up the best because it was least exposed back then, right?

[Liz Ann Saunders]

Least exposed.

[Barry Ritholtz]

That was before Microsoft and Intel.

[Liz Ann Saunders]

And price weighted, not cap weighted.

[Barry Ritholtz]

Right? That's right. So, so I just think we.

[Liz Ann Saunders]

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, 19% at the index level. But the, here's, here's another set of statistics. The average max, the average member maximum drawdown for the S and P year to date is 24%. So the average member has had a bear market. The average member within the Nasdaq's maximum drawdown is 47%.

[Barry Ritholtz]

Wow, now you want cap weighted.

[Liz Ann Saunders]

Well, the average member just each individual member was there? 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 9 intraday low, we haven't had much 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 level which has that cap bias to it.

[Barry Ritholtz]

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?

[Liz Ann Saunders]

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.

[Barry Ritholtz]

So Zweig hated that and I'm not a fan either.

[Liz Ann Saunders]

But often the specificity around that has to do with the amount of money.

[Barry Ritholtz]

In money market seven point something trillion.

[Liz Ann Saunders]

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.

[Barry Ritholtz]

Didn't that money mostly come from bonds?

[Liz Ann Saunders]

It did.

[Barry Ritholtz]

You're getting such low yield and bonds.

[Liz Ann Saunders]

So mine I think a lot of it's sticky.

[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 5352 in the Schwab. What is it? Snox 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?

[Liz Ann Saunders]

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 market capitalization.

[Barry Ritholtz]

It'S gone up less than the stock market.

[Liz Ann Saunders]

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%.

[Barry Ritholtz]

Huh. That's huge.

[Liz Ann Saunders]

Now we're only at about 12%. So the math is such that 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 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.

[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 going to 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 for every.

[Liz Ann Saunders]

Buyer there's a seller.

[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.

[Liz Ann Saunders]

And also the more buyers than sellers. No, no, no, no.

[Barry Ritholtz]

So you are tagging all my favorite pets.

[Liz Ann Saunders]

There's maybe more enthusiasm on the buy side versus the enthusiasm, but there's no more buyers and sellers or vice versa for everybody.

[Barry Ritholtz]

Buyers, sellers, my head trader used to say there are and sellers at this level and now you go up to the nice 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. At 2755 there may be more buyers in stock for sale, but at 2775 then you, you've. That's how you end up with price stability. So yeah, more buyers and sellers. No, no, they're an equal amount of bottom 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. And that seems to really explain that. All right, I like that one. I have to get you out to catch your plane, so I only have you for a limited amount of time. Let's speed through our favorite questions, starting with tell us about your mentors who help shape your career. I'm pretty sure I know the two.

[Liz Ann Saunders]

Shocker. Marty Zweig.

[Barry Ritholtz]

Yeah.

[Liz Ann Saunders]

Chuck Schwab.

[Barry Ritholtz]

Okay. And in the world, by the way, not. Not too shabby.

[Liz Ann Saunders]

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 Rukeyser. One of the best pieces of advice he gave me 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 onto 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 moment of okay, get people to understand what you're talking about.

[Barry Ritholtz]

That's so funny. My mom was a real estate agent. My wife is an art teacher. And it's always make them understand it. Don't clutter it up with jargon.

[Liz Ann Saunders]

That's right.

[Barry Ritholtz]

Make it. 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?

[Liz Ann Saunders]

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 reports, reports and deep dive Fed research. But my favorite book of all time, and it is market related, is reminiscences of a stock operation. Absolute favorite. I. I tell young people to buy it all the time. It still resonates today.

[Barry Ritholtz]

And you substitute AI for railroads and telegraphs.

[Liz Ann Saunders]

Exactly.

[Barry Ritholtz]

It's the same story.

[Liz Ann Saunders]

It's the same. It's the same story. But I am a big podcast listener, so that's the longer form way. Including masters in business.

[Barry Ritholtz]

Well, thank you.

[Liz Ann Saunders]

That I absorb information beyond the traditional drivers that come into my inbox. Literally.

[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?

[Liz Ann Saunders]

I listen to Masters in Business. I love Grant Williams series 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 SmartLife. I just love those guys.

[Barry Ritholtz]

Those guys are great.

[Liz Ann Saunders]

They're great. They're so fun.

[Barry Ritholtz]

I'm gonna tell you, I listened. I've had Michael Lewis on the podcast A Dog.

[Liz Ann Saunders]

I have met and have interviewed Michael Lewis on stage at Schwab's Impact Conference.

[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.

[Liz Ann Saunders]

It was unbelievable. And what his friends said to him or his therapist said to him, the reason why you're so exhausted after this life tragedy is in your mind. You're rewriting the future without her. Without her.

[Barry Ritholtz]

Right.

[Liz Ann Saunders]

It's crazy. That was such a moment of wow. But yeah, that was one of the most impactful interviews I've heard.

[Barry Ritholtz]

That stayed with me for a long.

[Liz Ann Saunders]

Time in terms of what I'm watching. Well, morning show just started back up again, so we'll get back into that. And I loved Department Q.

[Barry Ritholtz]

So did I.

[Liz Ann Saunders]

So good. It was intense.

[Barry Ritholtz]

It was a little slow, but they really. It really paid off. If you like Department Q, there's a movie, I want to say, it's on Netflix called Black Bag. That's the same sort of espionage thing. And I walked in on my wife watching Killing Eve.

[Liz Ann Saunders]

That was great.

[Barry Ritholtz]

Which she's like, it was great. Like I'm.

[Liz Ann Saunders]

Queen's Gambit was great.

[Barry Ritholtz]

There's. There's been a ton of stuff. We, we just finished the Gilded Age, which is. Which that's feels modern.

[Liz Ann Saunders]

Modern. 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.

[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, absolutely. So that's on my. 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.

[Liz Ann Saunders]

Yeah. It's fun to go back and watch some of the old show shows.

[Barry Ritholtz]

Absolutely. All right, our last two questions. We'll get you out of here on time. A recent college grad is interested in a career in investing or doing market strategy. What sort of advice would you give them?

[Liz Ann Saunders]

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 have I done, especially 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 is be interested.

[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.

[Liz Ann Saunders]

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. 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. And it would have been interesting to kind of know that in advance. The little birdie landing on your shoulder saying, 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.

[Barry Ritholtz]

Really interesting. Liz Ann, as always, delightful. Thank you so much for being here. Thank you, Barry, with your time. Always really, really interesting. We have been speaking with Liz Ann Saunders. She is the chief investment strategist at Schwab, helping to oversee $11 trillion in client fund 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 as 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.

[Podcast Producer / Announcer]

Anna Luke is the podcast producer.

[Barry Ritholtz]

Sage Bauman 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.

[Podcast Producer / Announcer]

On Bloomberg Radio Video.