More from Schwab strategist Liz Ann Sonders on TechTicker:
Rising interest rates could trigger a stampede out of the “safe” asset class. So where’t that money going to go? Into the one that has done well lately.
Peter Gorenstein: The Dow Jones Industrial Average is on the verge of 11,000 for the first time in 18 months on the back of Friday’s positive jobs report and Monday’s better-than-expected reports on pending home sales and ISM services, a private trade group measure of the U.S. service sector.
Charles Schwab’s chief investment strategist Liz Ann Sonders believes the rally isn’t over yet, even if the market loses some momentum in the near term. “I think the base case is for more of grinding higher versus the straight shot up that we saw since last March,” she tells Aaron and Henry in the accompanying clip.
Sonders, who correctly called the turn last March, cites several reasons for optimism:
- — Investors still don’t fully believe in stocks. “The wall of worry is still very much intact,” she notes. That’s certainly true judging by first quarter fund flows. While investors poured more than $90 billion into bond funds, less than $3 billion went to U.S. stocks funds, according to a Wall Street Journal story citing Investment Company Institute data.
- — A potential bear market in bonds. “In the event we continue to see a tick up in the long end of the yield curve you’re going start to get some significant hits on the bond side,” Sonders says. Those losses, she thinks, could trigger a “melt-up” in equities as investors rotate out of fixed income and pour money into the waiting arms of the stock market.
- — Stocks are not overpriced. Sonders thinks the estimated 2010 earnings of $78 per share for the S&P 500 is conservative. Even with those numbers and a 17 times multiple, which she thinks is fairly modest giving the low inflation rates, 1300 on the S&P 500 is “not a big stretch.”
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