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Record Territory: Could the Bull Market Continue in 2017?

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RANDY FREDERICK: While the rally in equities has cooled a bit, the market remains at or very near record territory. Liz Ann Sonders, Schwab’s chief investment strategist, joins me for the January 10 Schwab Market Snapshot to discuss why the current pause may be only temporary and why equities may still have room to run. Welcome back, Liz Ann.

LIZ ANN SONDERS: Thanks, Randy. And thanks, everybody, for tuning in.

RANDY: So, Liz Ann, in your outlook for 2017, you cited improving economic data as a key factor for why the bull market will likely continue. And, of course, one key component of that is the labor market. So can you give us your take on last week’s December employment report, and how that supports your perspective?

LIZ ANN: So the key headline in the jobs report was—which is payrolls—was a little bit lighter than what was expected, but in digging into the data it looks like a lot of that was weather-related. The good news is there were upward revisions to the prior months. The unemployment rate did tick up a tenth, but that’s for the good reason, and that labor force participation is picking back up.

I guess the one piece of the number that got a lot of attention was wage gains, where average hourly earnings on a year-over-year basis jumped up 2.9%. And there are some other measures that we look at that show growth in wages even higher. So that’s good news in terms of the consumer. And I think that is one of the things that has translated into better confidence readings. You’re seeing it not only in terms of consumers. You’re seeing higher investor confidence. And then, in particular, higher business confidence. So this improvement in economic growth, which it’s important to point out predated the election—people tie the market rally to the election—but the improvement in the economic data actually started in the middle of October.

And then from an earnings standpoint, earnings moved back into positive territory in the third quarter. So there was some basis for this rally in advance of just the election. But I think what we’re witnessing as we start 2017 is a revival of animal spirits, which typically starts out as just that confidence metric, but then can eventually turn into actual activity, and that’s certainly the hope into the remainder of this year.

RANDY: Well, of course, at Schwab, we never give very specific price forecasts, but what are you expecting from the equity markets in 2017?

LIZ ANN: Well, for one thing, I think we’re still in a secular bull market. But I will tell you that if we were to see the pace of gains continue in 2017, like we did in the first several weeks after the election, that would actually make me a little bit nervous. I wouldn’t mind an environment where you take—I don’t know, call it two steps forward and a half a step back—where the market has a nice rally, it consolidates some of those gains. That’s a healthier pattern for 2017.

So this pause you mentioned which we got toward the end of the year and the beginning of the year, those are healthy pauses.

In general, though, we think the outlook is pretty decent. Valuations are not terribly stretched, and that’s courtesy of that improvement in earnings growth. We’re looking now at a consensus expectation of about 13% earnings growth in 2017. And, interestingly enough, that doesn’t include much, if anything, benefitting from whether it’s infrastructure spending, or corporate or personal tax reform, or regulatory reform. So that would potentially just be icing on the cake.

The only potential problem is investor sentiment. The attitudinal measures show a little bit of frothiness. The good news is it’s not yet really matched by the behavioral measures of investor sentiment. So we’ve only just started to see renewed interest back in the U.S. equity market through vehicles like mutual funds and exchange traded funds. So that still, I think, sits as an opportunity for 2017.

RANDY: Well, now, let’s shift gears just a little bit, because aside from economic data, President-elect Donald Trump certainly has been shaking things up a bit, even before his inauguration. What policies or actions in Washington should equity investors be keeping an eye on over the next few months?

LIZ ANN: Well, clearly, one of the topics has been the pro-business orientation of the Trump administration. And just, interestingly, to quantify that, if you look at the incoming president, vice president, and the key cabinet positions—at least those that are recommended at this point—it’s collectively 83 years’ worth of business experience, which is, by far, an all-time record in the modern era. So that’s one way to quantify it.

Key, though, will be whether it’s offset by some of the anti-growth measures associated with protectionism, some of the tariffs, anti-trade. So if we can kind of keep at the top of the priority spectrum those pro-business initiatives, like corporate tax reform, even fundamental personal tax reform, regulatory reform, and then maybe a public-private partnership in infrastructure spending. If that’s not offset by the protectionist measures, I think we’re in pretty good shape for 2017.

RANDY: Thank you, so much, Liz Ann. Unfortunately, that’s all the time we have for today. Listen, if you’d like to read more from Liz Ann, you can get that in the Insights section of Schwab.com. You can follow Liz Ann on Twitter @LizAnnSonders and you can follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, business, and other conditions.

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The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

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