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Commentary

Sonders: Bull Market Can Keep Chugging Along

It might be a bumpy ride, but with the Fed poised for a slow increase in rates and valuations not radically out of line, U.S. stocks can keep moving higher.

Liz Ann Sonders, chief investment strategist at Charles Schwab, kicked off the 2016 Morningstar ETF Conference laying out her case for why she thinks the U.S. bull market can keep chugging along.

Fed Ready to Raise
Sonders thinks the Fed is poised to raise rates this year, even if the latest jobs numbers and ISM data means that September is becoming less likely. She pointed to a few factors behind the Fed's eagerness to continue to tighten again. One is that inflation is beginning to pick up somewhat, particularly in the core CPI index which includes a larger weight toward housing.

Second, the market as a whole is underestimating the level of wage growth because it isn't adjusting for the fact that many of the new jobs are lower-wage positions and that is dragging down the overall numbers. Sonders suggested that if you look at the Atlanta Fed's wage tracker to find numbers that try are adjusted for the changing workforce you'll see more pressure which could lead to more inflation.

Even if there is an increase this year, the path of increases is likely to remain quite slow given how sluggish the recovery in the U.S. has been. But sluggishness does not lead Sonders to worry about an imminent recession. She doesn't see the expansion of dying of old age. Just because we haven't had a recession in a while doesn't mean we are due for one now. There needs to be a buildup of excesses across the economy, and we just haven't seen that happen. Consumers continue to prefer saving versus spending, and there hasn't been excess business investment.

Valuations Not Out of Line
What does this mean for stocks? Sonders doesn't think valuations look particularly stretched or particularly attractive at the moment. Looking across a number of metrics some show the S&P 500 as being quite undervalued and some quite overvalued, but many mainstream ones like forward P/E are only slightly stretched. Generally speaking, metrics that take inflation or low rates into account look more reasonable than those that don’t. And slightly higher than normal valuations generally don't mark the end of the bull market as valuations usually way overshoot average before coming back down to earth and we haven't seen that yet.

Earnings should also provide support to the market. Sonders thinks we've seen the trough though as oil prices have stabilized and the dollar has stopped rising against global currencies. She doesn't see earnings growing quickly due to labor costs but the year-over-year declines should be mostly behind us.

All in, her advice is to stick to your asset allocation to U.S. stocks and then use any volatility driven by things like the election or the Fed to try and pick up some bargains.