Dan, Wet sanding is a touchy thing. If you have prepared the base correctly(made it smooth enough) all you want to do is take the sheen off the entire surface without going through the coat your sanding. In other words sand enough but not too much. Experience will get you there. Remember,  you can't have a good varnish job without a smooth base.   SEEYA Jack  

PS   I don’t use Schooner Varnish but I’m not aware of any property in it that would call for any other practice than the one I outlined.

Dan, another thought, Thin your varnish so that it flows well and has as little brush indentation as possible. The next coat will not adhere well to a shiny spot. SEEYA Jack

You can actually use a W-D paper that is too fine. The trick - between coats- is to use a grit that is coarse enough to dull the surface leaving very light sand scratches that create tooth for the next coat of varnish and fine enough to not leave sand scratch swells in the next coat. The finer paper or steel wool in a final coat will allow a satin or polishable surface. So then, you may want to do some trial samples to perfect your technique and judge for yourself.

Also, reducing varnish will make it dry harder and thinner, and the harder it is, the more tooth is required between coats. Use a brushing liquid such as 333 to enable the varnish to flow and even out any brush marks before it begins to set a membrane as it begins to dry.

two more cents....