More pain ahead likely after ‘recipe for serious profit taking’: Charles Schwab strategist

A “recipe for some serious profit-taking” led to Thursday’s sudden market plunge — and some more sell-off days are likely, says one strategist.

“I would be surprised if we just had one day of weakness, and then we whistled back to work tomorrow,” Liz Ann Sonders, Charles Schwab chief investment strategist, told Yahoo Finance.

Sonders says concerns over a second wave of COVID-19 in some states “have brought some jitters into the market.”

“There was so much economic froth that was starting to build in the markets, particularly among really small traders,” she added.

Fed Chair Jerome Powell’s comments yesterday also caused concern among investors.

“He certainly wasn’t reinforcing the recovery is around the corner, ‘nothing to worry about here’,” said Sonders. “So I think it was just a recipe for some serious profit-taking, especially given where you’re seeing the weakness concentrated.”

She pointed to recent head-scratching moves in shares of companies that went bankrupt, which had been soaring on Monday.

Even the recent rally in small-cap stocks was more of a sign of speculation, rather than a positive signal, she said.

“When you look inside at the small-cap rally that we’ve seen over the last month or so, there was an extremely low-quality bias to it,” said Sonders.

“If you look at the difference between the zombie companies, companies that don’t earn enough to pay interest on debt, those were overall handily outperforming the non-zombies within the Russell 2000 (^RUT).”

The recovery is going to be ‘a very, very long period of time’

Most analysts agree the markets won’t be testing the March 23rd lows, but Thursday’s plunge could be followed by more days of market declines.

“I think we have some work to do to ease some of this speculative fervor that has really sort of hit a fever pitch,” said Sonders.

All the S&P (^GSPC) sectors were in the red during Thursday’s decline, with energy and financials leading to the downside. The Federal Reserve indicated there would be no rate hikes likely through 2022, which put pressure on banks stocks.

Travel stocks, which were initially hit hard by the COVID-19 crisis and had rebounded over the last several weeks, were also heavy decliners on Thursday.

“I just think the [economic] recovery is going to be a very, very long period of time,” said Sonders.

“When you just think of the ripple effects of the carnage that we are seeing, how likely it is that many restaurants can stay in business, at even 75% capacity? And you just think of the tentacles into other parts of the economy. I think that’s been the story that’s not been sufficiently told,” said Sonders.

Ines covers the U.S. stock market for Yahoo Finance. Follow her on Twitter at @ines_ferre

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