Liz Ann Sonders on was one of the preconference keynote speakers at Schwab Impact 2016 on Monday. (Photo: Schwab)

Schwab’s chief investment strategist, Liz Ann Sonders, addressed the opening preconference session at Schwab Impact 2016 by telling a good news, bad news story about the markets and the economy, while also addressing what the presidential election may mean for the markets.

She began her comments on the markets by reminding the thousands of attendees that “I’m a big sentiments watcher,” and presented her recasting of Sir John Templeton’s famous quote on how bull markets are perceived by investors. Her take: “This bull market was born on despair, grew on disbelief, is maturing on skepticism, and may die on acceptance.”

She said that throughout the current bull market, “we’ve been ping ponging between panic and relief.”

The markets have been affected by the policies of the Federal Reserve and other central banks, what she called ‘UMP,’ Unprecedented Monetary Policy, which has not only depressed interest income but has also led, since the end of the global financial crisis, to asset prices growing much faster than real economy prices. That, she said, has led to a “troubling gap between household net worth and GDP,” which she called “one of the biggest threats” to economic growth.

While the risk of recession remains low for the United States, which is showing only “minor stress,” her favorite recession model, the CSM U.S. Recession Probability Model, created by Cornerstone Macro, is “not flashing a recession warning.” Yes, “Inflation is picking up,” noting that “the Fed’s preferred measure” of inflation, PCE, is “running at 1.7%; the Fed’s target is 2%.” PCE is Personal Consumption Expenditures,

Some of the good news, Sonders said, is that “wage growth may be stronger than you think,” arguing that “real incomes are surging,” especially on lower end of the wage spectrum.

On the worrying news side, Sonders mentioned a new white paper she’s written on the deleterious effects of rising health care costs for consumers, in which she argues that “the spike to near 5%” increase in healthcare PCI “is unprecedented over the past 20 years.”

As for the election’s impact on the markets, Sonders turned to the data, showing that in open election years—those when there is no incumbent president running for reelection—the stock market tends to be weaker. However, when the incumbent party wins the presidency, “the stock market wins,” which she partly credited to the fact that the markets like “the certainty factor” of an incumbent party holding onto the White House.

Referring to recent voter polls that suggest Hillary Clinton is widening the gap with Donald Trump, she pointed out that in the 90-day runup to an election that turned out to be a “landslide, the markets do better.” As for how the markets will likely react to this presidential election, “we think the least unsettling outcome is a Clinton win and Republicans keep the House,” since markets tend to perform better with a “divided government” where the presidency is held by one party and Congress is controlled by the other party.

She then apologized for using the words “rigged,” to describe the influence of institutions in moving the markets, but said there was a grain of truth in such a contention. “Not a single dollar of net new money has been added to the U.S. equity market since 2008,” and reported that more than half of all daily trading is made by institutions, with individual investors’ share of trading lagging.

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