Liz Ann Sonders and Jeffrey Kleintop of Schwab are watching for more Fed increases and further strengthening of the dollar in 2016.

Monetary policy will be a major factor in market growth in the U.S. and around the world in 2016, according to experts at Charles Schwab. In its January 2016 market outlook, Liz Ann Sonders, Jeffrey Kleintop and others shared their views on the direction the market will take this year, noting that “unfinished business” from 2015 will lead to only modest gains.

The Federal Reserve finally raised interest rates in December, but the new question is how quickly rates will increase throughout 2016. Liz Ann Sonders, chief investment strategist for Schwab, wrote that a gradual pace of rate increases is likely a good thing for stocks.

Historically, in years when the Fed declined to raise rates at most Federal Open Market Committee meetings, the S&P 500 returned an average 10.8% in the following year, according to Sonders. When the Fed has raised rates at every or most meetings, the S&P 500 fell an average 2.7% the following year.

So, how fast can we expect the Fed to raise rates?

A key determinant, Sonders said, is the strength of the U.S. dollar. “A stronger dollar acts as a drag on the U.S. economy and hurts corporate earnings,” she wrote. As long as the dollar remains strong, the Fed will likely stick to a slow pace.

Inflation is another important factor. Faster rate increases would suggest the Fed is trying to “combat an inflation problem or an overheating economy (or both),” Sonders said, neither of which is good for the stock market.

Overall, Schwab is taking a “neutral” view of U.S. stocks, Sonders wrote, noting that the stock market appears to still be in the “mature phase of a ‘secular’ (long-term) bull market.”

Valuations are up slightly, and stock buybacks and dividend increases have contributed to the continued bull market, now approaching its seventh year, but weak earnings and higher borrowing costs could be a drag. Wider spreads between corporate bonds and Treasuries could also be a problem this year.

“The bouts of volatility that the stock market experienced in 2015 are likely to persist into 2016, driven by monetary policy divergences around the world and uncertainty about policy changes and economic growth,” Sonders wrote. “That said, the stock market has proven to be resilient during this nearly seven-year bull market. In fact, investor sentiment remains a compelling argument for why this bull market is probably not on its last legs.”

Investor sentiment can be measured in their attitude toward the market, but also where they’re actually putting their money, and to that end, “investors have not embraced this bull market,” according to Sonders. Since 2008, inflows to U.S. equity mutual funds increased only in 2013, she wrote, and 2015 may show the highest level of outflows in the past eight years.

“The skepticism and anxiety investors have displayed during much of the current bull market is perhaps understandable, given the severity of the financial crisis and bear market. Although persistent outflows from U.S. equities suggests a build-up of investor cash, we are hesitant to make the call that flows will pick up in 2016, given the unfinished business this outlook details.”

Non-U.S. developed markets provide the most opportunity in 2016, according to Jeffrey Kleintop, chief global investment strategist for Schwab. He expects lingering concerns over the strengthening U.S. dollar, a turnaround in inflation and diverging monetary policies could limit growth in emerging markets.

Overall, though, he expects global growth to improve this year, with low risk for a global recession. “Global GDP growth of about 3.5%, while slightly below the pace of the mid-2000s, would mark a return to the 50-year average pace of growth,” according to Kleintop.

Two sectors that are expected to grow this year are information technology and financials, according to Brad Sorenson, managing director of market and sector analysis for Schwab’s Center for Financial Research.

High consumer interest and businesses’ need to continually improve their technology are a boost for the sector, he wrote. Furthermore, the sector has consistently performed well in the six months following an initial rate increase from the Fed.

If the Fed takes a gradual approach to increasing rates, that could bode well for financials, too. “Any increase in the federal funds rate, the Fed’s benchmark rate, provides a boost to financial services companies that are holding large amounts of cash,” he wrote.

— Read Investor Sentiment Hit Two-Year Low in Q4: John Hancock on ThinkAdvisor.