Don't be surprised if the stock market corrects by as much as 10% this year, but don't even think about giving up on the secular bull market.
That's the bottom line message from Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. Inc.
Speaking at the Inside ETFs conference in Fort Lauderdale, Fla., on Tuesday, Ms. Sonders stressed that from both valuation and sentiment perspectives, there is no reason to walk away from the equity markets at this point.
“There is a slightly elevated risk of a 10% correction this year, but I don't think the secular bull market is over,” she said. “I have some short-term concerns, but I personally think the bull market we're in now will be the best is our lifetime.”
Some of the driving forces she identified include the fact that U.S. businesses “are sitting on a huge hoard of cash, which is at a level not seen since World War II,” she said. “We know the capital is there, but we haven't had the animal spirits to put it back to work yet. But this is the year we'll probably see increase in [capital expenditure] spending.”
Inflation is not a threat at this time, she explained, because “there is no velocity of money.”
“The money is not multiplying and that has held inflation in check, but it has also kept economic growth low,” Ms. Sonders said. “You don't get an inflation problem when you have no velocity of money, but if we start to see velocity pick up, then I think we could start to change the thinking around future [Federal Reserve] policy.”
The current spread between bank deposits and bank lending, which Ms. Sonders said has never been as wide as it is today, could narrow this year as lending picks up.
“But we're still a long way from the point where lending matches deposits,” she added.
Another area of potential fuel for the U.S. economy is one of Ms. Sonders' favorite themes, the U.S. manufacturing renaissance.
“We're at an inflection point,” she said. “For the first time in post-World War II history, U.S. manufacturing is up three years in a row, but keep in mind it is coming off a very low base and it is still only 13% of the U.S. economy.”
In terms of equity market valuations, Ms. Sonders said she is not worried about the fact that forward price-earnings ratios are around the historic median level.
“Bull markets rarely stop at the median P/E,” she said.
In making her point, Ms. Sonders used a slide showing that the average trailing P/E of every bull market since the 1950s was 18.7, which compares to the current level of 16.6.
“We know that profit margins are at or near all-time highs,” she said. “But unless you're rolling over into a crash, it has not been historically a problem for the market coming off all-time highs in profit margins.”