'Year-End Pop' in Stocks Could Happen: Schwab's Sonders

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00:00Do you expect a Santa Claus rally into the end of the year?

00:04Possibly. It wouldn't surprise me, though, between now and then where we get a bit more

00:09choppiness and weakness. I think some of the position on wines are maybe not sort of fully

00:15baked in. But then to see a bit of a rally, particularly after the Fed meeting, which is

00:20sort of that near term moment of uncertainty that has been part of some of this recent

00:26volatility in the market, it wouldn't surprise me to see another year end pop.

00:30Does it puzzle you to see that futures are now pricing in a 96 percent chance of a cut?

00:37Are we are we all on board that a December cut is definitely happening?

00:42Well, the Fed doesn't tend to buck market odds when they're as lofty as they are right now.

00:48But it wouldn't surprise me if we got what is often termed a hawkish cut. You could argue that

00:54if the Fed is thinking maybe there's a moment where a pause might make some sense.

01:00Maybe it's better to to provide that cut now, given market expectations, but then essentially

01:06telegraph a pause as opposed to having cut at the recent meetings, then say we're pausing

01:12in December and then telegraphing another cut given the absence of of data. So, you know,

01:20in my mind, that's the most likely scenario is the Fed cuts and in the statement and reinforced

01:27during the press conference. It's a little bit more of what we heard last time, which is let's

01:32not assume we're on this continued path of additional cuts to come, at least in the near term.

01:36If you zoom out, though, Lizanne, I guess it doesn't really matter so much what happens in

01:41December. If, you know, President Trump picks a dovish chair, Kevin Hassett or any of the other

01:48candidates, and we do get a terminal rate at three percent or even lower in 26, 27. Is that great for

01:56markets? Well, first of all, the CNFOMC does not stand for chair. It stands for committee. So this is

02:04a these are decisions that are made by committee via a voting process. And I think what's maybe

02:10interesting as we head into what what everyone is assuming, and I know you guys are reporting,

02:16it's it's going to be Cassett that it, you know, the the greater willingness for dissent for voicing

02:23opinions and perspectives about the path for monetary policy against some, you know, sort of standard

02:30chair driven view, like under the days of Alan Greenspan. I think it's an interesting time. And

02:36I would expect that there will be bigger differences in terms of the voices as we hear Fed speakers out

02:44on the on the road. But I also think on a going forward basis, like we have seen in the recent couple

02:49of meetings, greater number of dissents, possibly in both directions, which may be a way to reinforce

02:57the independence of the Fed and the ability and willingness to buck any one particular voice.

03:05All right. So that's the macro look, what's going to happen with the Fed. If you step

03:11into this market of stocks, Lizanne, and look at, you know, the valuations we saw in a John

03:18author's piece this morning, that valuations for the cap weighted S&P 500 that we all know and love

03:24are up around 25, whereas the equal weight is still at 20 because these, you know, Mag 7 stocks and

03:31NVIDIA in particular are pulling us so much higher. Does the concentration risk concern you?

03:38Well, here's the thing about the Mag 7. And I think we're going to start to see maybe less

03:43of a focus on that particular cohort of seven stocks, because none of them, none of the seven

03:50rank in the top 10 from a price performance perspective. And in fact, none of them are

03:57the number one contributor to year to date S&P returns. So I think that's a really important

04:04point because I think many investors conflate contribution and price performance. NVIDIA is

04:11still the second largest contributor to S&P gains, but it's ranked worse than I think 60th in terms of

04:18ranking within the S&P 500. Broadcom is now the number one contributor to S&P returns. It's among

04:26the better performers. It doesn't happen to be in the Mag 7. So I think next year might be the year

04:33where there's a little bit less of sort of this unifocus on that particular cohort of names.

04:39Well, we have seen the equal weighted index. By the way, I'm showing the chart where you can see

04:43the valuations, the earnings multiples have separated. And the reason we know from three

04:51years ago is because today, I think, or Friday was the three-year birthday of chat GPT. So that's

04:58a huge driver there. We did see the S&P equal weighted index rallying the last five sessions

05:05in a row. Are you starting to see that broadening out? Do you think the all-important retail investor

05:10is dipping her or his toe into that as well? Yeah, I think investors across the spectrum,

05:16inclusive of institutional investors, are looking to take advantage of some of these rotations that

05:22are happening. And I don't think it's just purely a rebalancing that tends to kick in when you get to

05:29the last month of the year, either rebalancing strategies on the part of individuals or the more

05:34formulaic rebalancing strategies on the part of many institutions. I think there really is a thirst

05:40and a desire to find opportunities outside the mega cap leadership or prior leadership areas. And I think

05:48that that is likely to persist. Now, I think equal weight is pretty interesting here right now.

05:53That said, I think it may be still at this point a stretch to say that's going to be linear and that

06:00we're going to see persistent outperformance by equal weight. But I think we're going to see fits

06:04and starts of it. I think there is a lot of money looking for opportunities, whether it's because

06:08of valuation concerns, frothy sentiment concerns, leverage to any sort of, you know, additional easing

06:17on the part of the Federal Reserve. There's lots of sort of fundamental rationales why that would

06:22exist. And I do think that that is going to continue, but importantly, not in a linear fashion in fits

06:27and starts.

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