Market Pullback Should Not Be a Surprise, Says Schwab’s Aguilar

by birtanpublished on September 15, 2020

What is the character of this pullback you have the advantage of kathy and lisanne to give you perspective as well what is the nature of the pullback we've seen omar well good morning tom definitely is that

Out of my range of understanding a lot of the discussion relying on celebrities but i can tell you though that um a big part of what the market is is going through now is something that in a

Way it shouldn't be coming as a surprise as we come out of this summer and such an amazing run in the market we clearly speculated what what could be the fault

Look like and if you actually see all the sources of uncertainty we had and the gap between the market and the economy getting bigger and bigger

That all of a sudden created that environment for a you know potential volatility and what we're observing right here you put it into the context of the size of the rally that we have seen since april we're just seeing

Volatility the size of the correction even though in the nasdaq has significant is still you know very small relative to the size of of the bull market we saw earlier in the

Year omar a really serious question and i don't want you to speak for the executives of schwab and mr schwab as well he can do that for himself schwab and others in retail electronic brokerage

Have been pinatas about the sizeable retail trading we're seeing do you buy that idea that there's something ill about all that retail trading well you know the the our job at schwab

Is always to guide retail investors to find their best way to trade and in many cases to find you know the opportunities they find in the market so that they can use their capital in the wise way

Of course there's a lot of you know players in the market there's a lot of activity in the market and the size of the retail trading especially the high frequency retail trading has had an impact

In the market no question about it now i think a big part of the discussion of what we do at investment management part of schwab it also involves you know trying to guide them into the

Behavioral aspects of the market if you actually see a lot of the retail activity it usually tends to be very short-term in age nature and in many cases tends to be fairly

Related to behavioral economics um so we do do a lot of research and we provide a lot of advice to our retail clients to try to guide them to understand what is really the motivation

Behind a lot of the trading is it really more for a short-term trade is it really more consistent with their investment objectives well omar you mentioned two things there

One on size the volume clearly increased over the last six months on the retail side the other on the character of the trading can you talk a little bit more about that whether you've seen a shift

To more short term than perhaps it was 12 months ago whether you've seen a shift from just the underlying stock to more options activity which is a big discussion in the last week or so can you give us

Some color some clarity there oh mark well you know the the i think the market environment has actually put you know clients and in general in investors in like two two camps and you can actually very

Clearly see through the activity that we see in the market on one hand we have what is called the behavioral finance the overconfident crowd the overconfident crowd that is a cognitive bias

That basically feels that clearly short-term trading it is the place to go mostly because central banks provide that extra liquidity and backstop for the market to continue to follow that trade you can actually see that

More in options you can see that more in just the momentum trade you can actually see and you can obviously think about all the different participants that are trading on

On and off regarding those short-term you know components on the other hand and we see that more and more often we actually see more of the other side of the trade which is some of those

You know investors that tend to be more risk-averse where less aversion which is more of an emotional bias in behavioral economics that tend to actually drive more and trying to be more safe

And try to put more cash on the sidelines and looking for protection so when you think about options it's it's both ways it basically allows for you to put money to work in the market

To try to put you know your views but also to try to seek protection so we actually see you know basically a bifurcation in terms of the the way that activity goes one is more

Short-term in nature the other one tends to be more long-term in nature so does this all balance itself out and keep the rotation into cyclicals intact despite the tech sell-off are we going to be basically be set back

And is tech going to regain the helm and everything else going to kind of limp along for a while well you know i i've always you know described this in just the theory of economics that basically say when you

Look at history of recessions normally the market takes off before the recession is finally completed but in one thing that has been common in all the prior recessions is that the source of the recession gets

Resolved before you start seeing the rotation from growth to value even though the market can continue to go up you actually see the rotation you know into value from growth and that's very typical of most of the

Recessions what we what is unique about this one is that this looks more as a recession that comes from a national disaster more than an economic you know driven you know recession and the reality

Though is that the majority of the natural disaster recessions they are actually solved because the national disaster is gone in this particular one we have not resolved the source of the recession

We're still trying to figure it out and therefore it's going to be very hard lisa to basically think about a serious rotation until we actually have our kid to the

Source of that you know solution for the recession source oh my tight on time just a quick one from me clearly there's many people that still haven't gone back to the office

Have you got any basic assumptions on what happens to volume with guys like yourself right now once people start going back to the office again well it's actually quite interesting uh

You know john because what we actually think is that there is a significant amount of people that are actually more comfortable trading from home and in fact a lot of the activity in terms of day trading tends to be more

Often of people that are now have more time to actually be training at home so we we don't necessarily anticipate to see any significant change in terms of how the different um you

Know activity within trading will actually happen of course it's all the speculation you know what we think about the bigger players people obviously like

On the asset management side you know we obviously all are working from home and therefore that is not going to make any difference in terms of how we operate now in terms of retail clients and in terms of others

You know clearly you know the the advantage that they have in terms of their technology that is provided by different you know providers is there so it is it is unclear to me that there will be a significant change in the

Volume that we see and we see a significant pickup in volume already

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