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Stock Rally Continues, but Is It Time for Markets to Take a Breather?

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RANDY FREDERICK: Since two days before the November presidential election, the markets have been on a real tear. Liz Ann Sonders, Schwab’s chief investment strategist, joins me for the March 7 Schwab Market Snapshot to discuss this market rally and whether or not the market may be getting just a little bit ahead of itself. Welcome back, Liz Ann.

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

RANDY: So, Liz Ann, I think everybody knows that we’ve been in a pretty impressive rally. The S&P 500 is up about 6% year-to-date and a remarkable 14% since just before the election. So what are your thoughts on this rally, and could it be maybe that the market is about ready to take a breather?

LIZ ANN: So one thing that we’ve been pointing out is that, although we do think the election did have a lot to do with the market’s rally, that many of the fundamental supports behind it actually kicked in even before the election. So the move from earnings being in a recession territory and negative territory back into positive, that occurred in the third quarter of last year. The economic data turned and became significantly stronger relative to expectations in October of last year.

So these fundamental supports predated the election. I think it’s important to point that out. We are celebrating, as we speak, basically, the eighth-year anniversary of this bull market. And it has been a strong one. It’s not the strongest in history. It’s not the longest in history. But if you look back at prior periods where we’ve had a similar run—we’re 97 months into this bull market—and if you look at past periods where we hit that point on similar strength, typically, the market had quite a bit more to go, at least over the next 6- to 12 months.

Now, in the short-term, I think there are some technical conditions that suggest the market may need to take a little bit of a breather. There’s been a tremendous amount of money that has flown into certain vehicles that track, say, the S&P 500—that suggests maybe there’s some froth. Many sentiment measures suggest that optimism has probably gotten a little bit too excessive. So I do think there is reason to think we may have short-term pullback. That said, I would take a pattern of two steps forward, half-a-step back, any day. I think that that allows for the bull market to be retained, and I think that’s a healthy environment.

RANDY: Well, many investors are probably curious how the market has been able to maintain this momentum—especially given that there’s a Fed meeting next week—and the probability of rate hike has risen so sharply and so high it’s almost a near certainty. Has the market forgotten the old adage, “Don’t fight the Fed”?

LIZ ANN: Well, a funny story about that adage. That was coined, that phrase was coined by my first boss, the late, great, Marty Zweig. So that’s near and dear to my heart. But I think we have a little bit of a different Fed in the most recent periods, and that is because of their greater transparency. So not just Janet Yellen, herself, but even her predecessor, as well as Fed governors, much more transparent right now. So we have a better idea of what the Fed is anticipating, as opposed to it being a surprise. So I think that that’s tempered some of that effect.

There’s also an old adage called, “Three steps and a stumble,” that used to refer to by the third hike, typically, the markets took a tumble. That, actually, has not been true in the more modern era, call it from the mid-70s on—and, in fact, after the third hike, historically, the markets continued to do fairly well. It’s also the case that the Fed is moving from operating at a much slower pace to a much quicker pace. And if you look at history of rate hike cycles, when the Fed is moving slowly in the first year, that’s good for the market. But when the Fed has reason to pick up the pace, i.e. stronger economy, that tends to be better for the market, and I think that’s the environment we’re in, in this year.

RANDY: Well, that’s all the time we have for today. Thank you so much for your insights, Liz Ann. Listen, if you want to read more from Liz Ann, you can get that in the Insights section of, or you can follow Liz Ann on Twitter @LizAnnSonders. And, of course, you can always 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, market, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Investing involves risk including loss of principal.

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

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.


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