Sonders on Stocks, Bonds, and the Fed

Though the market’s recent pullback may not be over yet, Charles Schwab Chief Investment Strategist Liz Ann Sonders says longer-term factors are making her optimistic about the stock market and economy.

“The [recent] spike in yields, while alarming, may not mean much more turmoil in the stock market than what we already saw,” Sonders writes in recent commentary on Schwab’s site. “The history of major up moves in yields shows stocks actually performing quite well; save for those periods when yields were rising due to inflation problems. That is decidedly not the case at present.”

Sonders adds that “our longer-term optimism has not been dented, even with the Fed on a path toward monetary policy normalization. Notwithstanding the downward revision to the very backward-looking first quarter real gross domestic product reading, the latest economic numbers have turned up. Capital spending is picking up; the regional manufacturing surveys were generally quite strong; consumer confidence has jumped; and the housing numbers have continued their surge.”

Volatility among risk assets is likely to continue in the shorter term, Sonders says, but she thinks the market is “transitioning to a market driven more by traditional fundamentals, and less by Fed policy.” And she discusses how sentiment has declined significantly from where it was in late May, a good sign for the market.

Sonders also discusses the Fed’s recent tapering talk, and the motivation behind it. She quotes from a piece Jeffries’ David Zervos wrote for John Mauldin’s Outside the Box, in which Zervos says Ben Bernanke’s “pronouncements appear to be a conscious effort to inject uncertainty into a fixed income market that feeds on certainty. He was taking a cue from the great Hyman Minsky. By acting against a market that had become too complacent, he was attempting to force out the dangerous and excessive leverage in the system. And while that may feel a little painful right now, we may end up being very thankful that the Committee took the actions it did … in the name of preserving future financial stability.”