Schwab’s Sonders: Where to
Invest as S&P Tops 4,000
The S&P 500 index set record highs, buoyed by growing optimism about economic growth. The $1.9trillion economic relief plan signedby President Joe Biden in Marchcoupled with his plans to spend evenmore ($2.25 trillion) on infrastructureinvestment and the growing numberof Americans vaccinated for COVID- 19underpin that optimism.
But there are growing questionsabout how far the rally can go andhow long it can last and whether thesome parts of the U.S. stock market areovervalued. That said, some sectors ofthe stock market may have more roomto run, Liz Ann Sonders, chief investment strategist at Charles Schwab, tellsInvestment Advisor.
WHAT HISTORY AND
VALUATIONS TELL US
Nicholas Colas, co-founder of Data TrekResearch, notes in his latest briefingreport that it’s very unusual for the S&P500 to post double-digit gains threeyears in a row — it gained 31.2% and 18%in 2019 and 2020, respectively — thoughnot unheard of. “Could that happenagain with an accommodative Fed anda Democratic President and Congresspushing for more fiscal aid? Yes, as longas rates don’t rise too high,” writes Colas.
Morningstar analyst Dave Sekera
writes in his Quarter-End Insights
report that the broad U.S. equity market
is 3% overvalued even after account-
ing “for a strong economic resurgence
in 2020” that carries over into 2021,
but many individual stocks are not,
including many value stocks, which
have outperformed year to date. “Value
stocks should benefit from the strong
economic resurgence in 2021 and 2022
… but … we no longer expect small-cap
stocks to outperform.”
However, “it’s not all blue skies,”
writes Bank of America Securities strat-
egists in a market note. “The market
appears to already be pricing in addi-
tional stimulus and the focus is shifting
to paying it back (i.e., higher taxes).
Valuations today are signaling anemic
long-term returns and rising rates are
also a headwind for both income inves-
tors … and corporate margins.”
KEEP A ‘VALUE MINDSET’
Sonders says that investors “should have
a value mindset but not put blinders on.”
That doesn’t mean buying a major stock
market value index, she said, but having
a “focus on the actual fundamentals of
growth and value for a stock.”
She recommends a combination of
passive and active investing because the
latter can address the higher correlation
that’s apparent now across and within
asset classes as well as the wider disper-
sion of potential returns among stocks.
“The biggest risk for the market is
speculative excess … We learned in the
late 90s and early 2000 periods that
speculative excess doesn’t make a lot
of fundamental sense but can last a
From a more fundamental view, she
noted that U.S. stock market is less over-
valued today than in the fourth quarter
of 2020, based on the forward price-to-
earnings ratio of around 23 despite the
excessive speculation in low quality sec-
tor of the market and the popularity of
special purpose acquisition companies
(SPACs), which are shell companies in
search of investment targets.
Sonders noted she’s “not saying themarket is cheap,” but she’s not concerned about valuations like she was in2000. She expects a “pop in inflationin conjunction with a huge surge ingrowth,” which also will raise rates, butisn’t concerned about systemic wageprice inflation.
As for where she sees value in thestock market today, Sonders said Schwabrates the financial and health care sectors as outperformers and utilities andconsumer staples as underperformersover the next months. She also favorssmall-caps, which are “more levered tothe pickup in the economy,” but onlyquality small-caps.
Jan. 27) and then fell to $53.50 on Feb.
4. Had the advisor sold then with theloss and parked the money for 30 days inanother stock, ETF or cash, they couldhave reinvested in GameStop if interested 31 days later — around March 8,when it was at $246.90.
The advisor generates the losses
now because they don’t know where
GameStop is going to be in November
or December, he says. “So there is
an opportunity, a window to harvest
Advisors need to be “tax-smart in
everything [they] are doing,” Klapprodt
said. Therefore, when buying and selling
stocks, “do it with a notion of tax-loss
harvesting. We encourage advisors to
think about the client tax bill and what
they can do to minimize it.”