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Schwab’s Sonders: Bull Market Still in Optimism Phase

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Liz Ann Sonders began her presentation at the Schwab Impact preconference Tuesday in Denver by quoting Sir John Templeton on bull markets, which the famed investor said “are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

This current bull market remains in the optimism phase, Schwab’s chief market strategist said, and positing that “we’re nowhere near the euphoria we see at market tops.” In a wide-ranging talk on the markets and economy, Sonders said saw a lot to like, but warned that “volatility is here to stay.” 

Among the good news for the markets and economy: the risk of recession is low; average payrolls are growing (which she suggested may have helped spur the Federal Reserve’s move to end quantitative easing); the U.S. had a record deficit drop in 2013; private-sector deleveraging “has come a long way”; the spread between private-sector and government spending is narrowing, helped by increased federal government spending since the sequestration; and the U.S. is now the world’s largest oil producer.

With the oil/gas sector’s capital expenditures accounting for only 8.2% of total U.S. capital expenditures, “decreasing energy prices may not take such a bite” out of the economy, Sonders said.

The Fed’s inflation benchmark, the personal consumption exenditures index (PCE), is “sitting well below the 2% threshold,” she said.

In her trademark “on-the-one-hand, on-the-other-hand” approach, Sonders did point out some of the less-than-good news. For example, consumer spending, which she calls the “big whammy” that accounts for two-thirds of U.S. economic growth, decreased during the third quarter of 2014. That record deficit drop in 2013 won’t be matched this year, and the debt remains at 100% of GDP.

The International Monetary Fund last month projected U.S. GDP growth of 2.2% in 2014 and 3.1% in 2015, but Sonders said “the IMF stinks on forecasting.”

In a follow-up interview Wednesday, Sonders said that U.S. economic growth “will have to come from the other one-third of the economy,” including government spending.

Continuing her litany on Tuesday, Sonders said the velocity of money “remains depressed” and that there remains a “big gap” between banks’ assets and their lending, which decoupled beginning in 2008.

What about the rise in the dollar? While it might seem like a rapid rise, “the spike in the dollar barely registers on a longer-term chart,” she pointed out. Moreover, the dollar is “going up for the right reasons.”

On inflation, she said the “market likes this zone of inflation” of between 1% and 2%. Margin debt is near its record highs, but she attributes that to institutions, not individuals.

However, she does detect a “pervasive sense of skepticism” among consumers, particularly in the equity markets, citing a Gallup poll that showed the lowest levels of individual stock ownership (even in mutual funds or 401(k)s) in nearly 30 years. “I don’t think,” she said in the Wednesday interview, that investor sentiment is “anywhere near the frothy levels” that existed in the mid-1990s “excess.”

Sonders’ conclusion? The fourth quarter of the year “seasonably bodes well for the S&P 500,” while the markets’ “valuation is not a problem.”

She was asked Wednesday: have we had our correction in the market?

“This one is over,” Sonders said with a smile.

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