Morningstar ETF Conference

Schwab strategist: Fed hike still on the table in 2016

The stock market is a 'decent' bet, but there are no screaming buys, said Charles Schwab's chief investment strategist, Liz Ann Sonders.

"I do think the market could continue to grind higher, but not without some drama," Sonders told attendees at the Morningstar ETF Conference on Wednesday. "An ongoing secular bull market is still a decent bet."

Under Sonders' analysis, there are no flashing buy signals for investors. Schwab is neutral on stocks in the United States, developed and emerging markets. "The best advice we can give investors is to stay with your long-term, normal allocation across the equity asset classes," she said.

Liz Ann Sonders, Charles Schwab's chief investment strategist
Mark Lennihan | AP

The risk of the U.S. economy falling into recession is low, Sonders said. She noted that Cornerstone Marco's well-respected recession model points to a 34 percent probability of the recession. "The risk of recession is never zero; there is something awry in the economy," Sonders said.

Some naysayers can point to an earnings recession among large U.S. companies as a sign of worse things to come. "The earnings recession is not an economic recession," Sonders said. A strong U.S. dollar and a crash in oil prices caused the earnings drop, and Sonders said those problems have passed.

The presidential election may supply some of that drama. Stock market performance tends to be weaker in election years when an incumbent isn't running, Sonders said, but "trying to forecast short-term market action around this election is a fool's game."

Historically, stocks have performed better in slow tightening cycles as opposed to fast cycles, where the Fed raises rates at every meeting after the initial rate increase. "If the Fed is moving slowly, it means that they are not chasing an overheated economy or an inflation problem," Sonders said.

Leading economic indicators from the Conference Board point to minor stress in the U.S. economy, but not another recession. These indicators have not surpassed their highs from the last economic expansion, Sonders said, and recessions happen when there are excesses in the economy, such as high inflation or surplus inventories.

Weighing in on the Fed

Sonders does still think there's a chance that the Federal Reserve raises interest rates in 2016. The current trader bet is that there's only a 42 percent chance that the Fed raises in December; an 18 percent chance it raises later this month.

Despite a weak August jobs report, "we do think the Fed would like to raise rates sometime between now and year-end," Sonders said during a keynote speech at the Morningstar exchange-traded funds conference in Chicago on Wednesday evening.

Sonders anticipates that the Fed will raise rates slowly. Policymakers are stuck in a "loop" because when they raise rates, the U.S. dollar strengthens, lending tightens, and "the Fed backs away because the market has already done its job for it," Sonders said. "I'm not sure we'll get out of this [loop] anytime soon."

Internationally, Sonders expects negative yields will persist as long as the European Central Bank and Bank of Japan continue their quantitative easing policies. "What the ECB and the Bank of Japan are doing relative to their economies is much bigger than what the U.S. has done," she said.