Schwab’s Liz Ann Sonders: Old bull market doesn’t mean dead bull market

But investors should expect volatility as election heats up.

The time to worry about the stock market is when investors are giddy with euphoria — and that’s just not happening yet, says Liz Ann Sonders, Schwab’s chief investment strategist.

Despite the looming presidential election and the prospect of rising interest rates, Ms. Sonders, speaking to advisers and investors at Morningstar’s 2016 ETF conference in Chicago on Wednesday, took a neutral stance on the stock market’s prospects.

Ms. Sonders said investor sentiment is just not frothy enough to be in the final stages, even though the bull market is in its seventh year.

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria,” she said, quoting Sir John Templeton. “I think we’re in the ‘mature optimism’ phase.”

Comparing the current market to the luckless comedian Rodney Dangerfield, Ms. Sonders said it gets no respect from investors. “Not a single dollar of net new money has come into the U.S. equity market since before the financial crisis,” she said.

Ms. Sonders, delayed by a late summer storm and recovering from leg surgery, also said that the market had yet to discount the results of the presidential race, although it could increase volatility in the next few months. Normally, an election year is good news for investors. But election years when there is no incumbent are typically the weakest, she said.

A survey of the economic landscape revealed few things for bulls or bears to cheer. For example, Ms. Sonders noted that the Federal Reserve was at the start of a campaign to tighten monetary policy and raise interest rates. But it’s likely to take its time. Mixed economic signals mean that a September rate hike is less likely, “although it hasn’t been swept off the table,” she said. “The Fed is in the slow process of taking the punch bowl away.”

And that’s the right decision, Ms. Sonders said, noting that wage gains could be stronger than many analysts think. Not only have average hourly earnings risen since 2015, so has the Federal Reserve Bank of Atlanta’s Wage Growth Tracker. The rise in wages also puts inflation back on the Fed’s radar.

“There’s a chance we could have an inflation scare, but no an inflation problem,” Ms. Sonders said.

But the pace of rate hikes is likely to be slow — and that’s a good thing for stock investors, she said. A slow tightening cycle typically sees an average 10.8% gain 12 months after its start. Faster cycles, where there’s a hike after every Fed meeting, often see a 2.7% decline after its start. The difference: Slow cycles mean the Fed isn’t chasing an overheated economy.

She dismissed the likelihood of negative interest rates in the U.S, as well as the monetary tactic’s effectiveness abroad. “They ought to give it up on negative rates,” Ms. Sonders said.

The likelihood of recession remains low, barring an exogenous event, she said. “Expansions don’t die of old age — they die because of excesses,” Ms. Sonders said. “If there’s one benefit to a sluggish recovery, it’s that is hasn’t built up the excesses that lead to recession.”