Charles Schwab Chief Investment Strategist Liz Ann Sonders joins Yahoo Finance Live to discuss how investors should navigate earnings, Fed rate hikes, high valuations, and Russia-Ukraine tensions.

Video Transcript

BRIAN SOZZI: Rollercoaster of a week for markets. Traders have had to digest everything from calls-- more calls on Wall Street for 50 basis point rate hikes in March to blow-out retail sales reports, to uncertainty continuing between Russia and Ukraine. Let's welcome on Charles Schwab chief investment strategist Liz Ann Sonders to get a pulse on all things markets heading into the weekend.

Liz Ann, always nice to see you. Mentioned in the break that you were on fire again on Twitter with a whole bunch of helpful stock market-related charts. One that caught my attention from you was the declining price to sales ratio for the NASDAQ, or in other words, tech stocks getting cheaper. Do you think tech is a place investors should be looking now or that trade is still off the table, given everything we are seeing with more volatility in the markets?

LIZ ANN SONDERS: I don't think any area in the market, whether it's at the sector level or at the category level, call it the FAANG type stocks, should be viewed with a monolithic lens. And I think that's one of the mistakes that investors could make this year, even if monolithic lens was the appropriate way to look at groups of stocks.

If you look within tech and you look at the last three months or so-- and the reason why I use that time frame is it takes you back to the point at which the Fed started tapering its balance sheet, so call that the start point of this move toward policy normalization-- value factors have been dominant performers even within sectors like tech. So you can be a lower case v value investor and not limit yourself to only the sectors that happen to be housed in the value indexes, like energy or financials or utilities, whatever it is.

So I'd say, look for value, but that shouldn't limit your search to places only outside of tech. You can apply that to tech, consumer discretionary, communication services. And I think a factor-based approach makes a lot of sense in this kind of market environment.

JULIE HYMAN: And so Liz Ann, we have been observing lately that we have been seeing just utter disasters of stock reactions to earnings in what feels like an increasing number of cases. So and it feels like, as Brian and I were just talking about, some of it is lack of patience on the part of investors that-- with sort of investment cycles by some of these high growth companies. Do you think that is the right way to view that? In other words, do you think people should be coming in here and looking for some of these disasters as potential opportunities?

LIZ ANN SONDERS: Well, it depends on what the underlying fundamentals are. I wouldn't just try to bottom fish a disaster simply because the stock has gone down a lot. In an environment like this where growth has slowed, we've got negative earnings revisions ratio, you've got the valuation issues that come into much more clarity when you're in a tightening cycle, longer duration, higher beta, higher risk, higher multiple areas are the ones that tend to take it on the chin.

So I wouldn't be a bottom fisher if the only thing you're using is a drawdown percent. I think what we're seeing is more discernment on the part of investors. It's part of the reason why equal-weight is performing better relative to cap weight, why active managers are performing much better now than they have in years.

And even among the FAANG type stocks, the big five, the super seven, the great eight, whatever, you know, categorization those sort of top 10 largest names in the cap weighted indexes, including the S&P and the NASDAQ, huge divergences in terms of how they're performing-- drawdowns as much as 40% in some areas, much more resilient in other areas. And I think that's going to persist. I think quality value fundamentals matter. And if you happen to see a drawdown and the fundamentals are still there, absolutely, but I wouldn't bottom fish purely based on price decline.

BRIAN SOZZI: Is this the new environment, Liz Ann? With, you know, so many investors we talked to, they have not-- I guess it's a little bit of a next generation investor. They have not seen or lived through or traded or invested in to rate hiking cycles. But when you see a stock like Roku, I think down 30%, it's mind boggling. Are moves like that more likely, as the Fed starts to move higher rates?

LIZ ANN SONDERS: Well, quite frankly, the lower quality, high spec trade has been under massive pressure throughout the past year. This is not a brand new thing. You look at these cohorts, whether it's non-profitable tech or the SPACs. Even the de-SPAC index is performing worse than the SPAC index. Weak balance sheet companies, heavily shorted stocks, the meme stocks, you could throw crypto in there, too.

So these high spec, high beta segments of the market, those are the ones that tend to come under significant pressure. So, you know, you can find examples on a day-to-day basis. But in those aforementioned cohorts, over the past year, you've had drawdowns anywhere from 50% to 80%, depending on what cohort you're looking at. So that's not a prospective thing. That's an environment in which we've been living for quite some time now.

JULIE HYMAN: And so I guess, Liz Ann, the question then becomes, how long is that environment going to persist? Is this for the foreseeable future now that, you know-- and a lot of this, again, has to do with-- well, it was anticipation of the Fed. Now it's the Fed is actually going to move and that you just don't have that speculative liquidity that is in the market.

LIZ ANN SONDERS: You know, at some point, I'm guessing speculative juices will be revived. I don't expect it in the near term. I think what's interesting about the reaction to Fed policy is, it's coming not because the Fed has actually started to tighten policy. They're still at the zero bound. They haven't given us the first rate hike yet. They're still adding to the balance sheet. And what's interesting is this parlor game of how many rate hikes will occur this year.

And market has priced in seven. You have folks out there with numbers higher than that. Yet, every time I hear those analyses, there's almost no attention on the balance sheet portion of it. When you are simultaneously trying to shrink a $9 trillion balance sheet, and you can apply the equivalency of, call it maybe somewhere between $400 and $600 billion of shrink is the equivalent of a rate hike, I think there's just the number of rate hikes misses the bigger picture of a tightening cycle that is unlike any that we have seen in the past because of that need to shrink the balance sheet, in addition to rate hike.

So it's the combination of what they do and the fact that, unlike in past periods, they're not giving us a playbook, they're not telling us in advance, well, here's what we're thinking in terms of balance sheet shrink, the amount per month, here's what we're thinking in terms of rate hikes. Data dependency is what they're emphasizing, which means we're all kind of living day-to-day in terms of what the data is going to look like and ultimately how the Fed has to behave.

BRIAN SOZZI: Lastly, Liz Ann, we have-- investors are clearly nervous regarding the situation between Russia and Ukraine. What should they be doing right now? If they're mostly-- if an investor is mostly allocated to stocks here, what should they be doing ahead into the weekend?

LIZ ANN SONDERS: I don't think there's one answer. I mean, that's a trading question if, given the end of your question, it's into the weekend. And I'm not a trader. The advice I give is not trading oriented. I would say that if you're thinking, should I-- you're thinking in extreme terms. You know, should I get out in advance of a three-day weekend? I like to always remind investors if they're thinking about or talking about all or nothing kind of decision, get in, get out approach, that's not investing. That's just gambling on moments in time. And that's-- investing should always be a disciplined process over time.

I think what is most important probably about the Russia-Ukraine situation is not so much the volatility it's causing on a very near-term basis. We see it pre-market, we see it intraday. But the impact any protracted military event would have on energy markets in an environment where oil prices are already high, natural gas prices have been volatile, but high, not so much because of a surge in demand, but because of geopolitics. And we know in the past that surging oil prices, especially in a waning growth environment, alone have caused recessions.

So you add that into the mix to energy crises happening around the globe already and the fact that we're now heading into a tightening cycle, I think it would probably elevate the fears about recession if, indeed, we see some sort of protracted military event. But to try to game it in terms of portfolio shifts in advance of a weekend or any other point, I wouldn't attempt to do that. I certainly don't have advice on that front.

BRIAN SOZZI: It's always a treat to get some time with you. Charles Schwab chief investment--

LIZ ANN SONDERS: Thanks.

BRIAN SOZZI: --strategist Liz Ann Sonders, have a great weekend. We'll talk to you soon.