Charles Schwab chief investment strategist Liz Ann Sonders had some encouraging words for scared investors, telling a financial advisor audience Tuesday at ETF.com's InsideETFs conference: “I personally think the bull market we’re in now will be the best we see in our lifetimes.”
The optimistic economic stance is not new for the Schwab economist, who has been consistently bullish in her frequent public appearances, but coming off a few days of rough market reversals, particularly in emerging markets, her superlative use of the word “best” underscored her high degree of confidence.
Sonders was careful to note that that what economists term a “secular bull market” does not exclude the possibility of market corrections. In fact, she noted that the stock market crash of 1987 came within the greatest bull market in history.
What’s more, Sonders said strong stock market years like 2013 tend to be followed by subsequent strong years, and the fact that we have had five consecutive years with positive market returns did not dampen her outlook for 2014.
That is because of both positive macroeconomic and microeconomic trends. Foremost among the former has been a long-developing but far from played out renaissance in U.S. manufacturing and energy production.
Two months ago, the U.S. actually produced more oil than it imported — a milestone — but Sonders has been following the trend since her first visit to mainland China in 2007, when two U.S. CEOs advised her to pay attention to what they foresaw as a “reshoring” trend within the decade.
Those CEOs foresaw, and Sonders brought data to support, that it would become uneconomical to remain in China and other emerging markets as well for a variety of reasons including restrained U.S. labor costs, rising emerging market labor costs, and abundant energy and low natural gas prices in the U.S.
In addition to the narrowing of the cost gap, the advantages that the U.S. has always had, such as a strong rule of law, superior infrastructure, labor market stability and advanced technology, are further draws for manufacturers restoring operations back to the U.S.
Sonders cited a key measure called landed cost gap; she cited studies by the Boston Consulting Group showing that once that measure reaches a level of around 15% to 17%, the economics of reshoring become positive. The U.S. is now at 16%; consequently, Sonders is optimistic about a resurgence in U.S. industrial activity.
And since U.S. manufacturing plants are out of date and badly in need of upgrading, she foresees a burst of private business spending that will further contribute to an expansion of U.S. GDP in the years ahead.
In fact, with the exception of federal spending, the key components of GDP growth have been positive, and the governmental spending drag — a consequence of the budget sequester — will peter out midyear and become neutral, she says.
Another macroeconomic positive the Schwab economist feels has not received due attention is the continuing shrinking of the deficit—down now to 3.3% of GDP and possibly in the high 2% range—because of both of the key contributing sides of the equation: government spending, as a result of the sequester, continues to shrink while the economic expansion is adding to revenues
On the microeconomic side, Sonders was upbeat about corporate earnings, answering bearish fears that U.S. companies are past peak profit margins by saying that markets can and do rise a year or two past such a peak, warning that only an earnings collapse — which she does not foresee — would signal danger.
Other conditions she sees as fueling the market’s rise is a level of sentiment she regards as “still lukewarm,” with stocks as a percent of household financial assets at merely the average level over the past 60-plus years.
At the institutional level, there is additional room for stock buying, since pension funds now have more fixed-income than equity exposure while endowments’ equity level is just 31%, down from 50% a decade ago.
These low levels of equity participation are a legacy of the flight to safety after the last crash, and the resurgence of interest in stocks remains in its infancy.
Stock market bears often cite elevated valuation levels as reasons for fear, but there, too, Sonders was unconcerned, calling valuations “neutral” by and large and saying that bulls and bears alike can tell any story based on the many ways there are to slice and dice valuations.
The Schwab economist relies more on forward P/E guidance (while stating its potential to mislead) rather than Shiller CAPE, a measure that distresses market bears.
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