Sonders, Schwab: Let's Get Normalized

A closely fought “tug-of-war” between bulls and bears has kept stocks trading in a tight range this year, and Charles Schwab strategists think the battle could continue for a while longer.

“The current stalemate in the US market could continue for some time, with bouts of volatility and pullbacks expected as the market anticipates the initial rate hike,” Brad Sorensen, Liz Ann Sonders, and Jeffrey Kleintop write in commentary on Schwab’s website. “Be prepared by staying diversified and consider buying protection, but we would view such an event as the pause that refreshes and help set up the next sustainable bull run. Investors should also look overseas as the aggressive stimulus measures being taken by the ECB appear to be beneficially impacting the economy, and may help equities perform better in the coming months.”

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The trio says that potential interest rate hikes are one of the issues at the center of the tug-of-war, and they have strong feelings on the issue. “You can place us firmly in the sooner-rather-than-later camp of raising rates; likely in September,” they say. “We believe it would help return the investing world to a more normal environment and aid savers — especially those nearing retirement, who have had to venture out the risk spectrum for yield. But initiation won’t likely mean a stair-step series of hikes is in store — the Fed has telegraphed it will be very cautious and data dependent in an effort not to short circuit the economic expansion. History shows the stock market performed much better when the Fed was hiking rates slowly vs. more quickly.  At this point, the Fed wants to normalize monetary policy, not tighten so the economy will slow as is typically the reason for hiking rates.”

They say the upside of rate hikes “is relatively limited” this year, but add that “slightly higher rates are nothing to fear and should be welcomed by most investors as it helps to signal a potential return to more ordinary economic and monetary conditions.” They also discuss the US economy, parsing the latest jobs and wage growth data and consumer spending trends.