Inflation Signs Amid Froth Top Sonders’ Stock Worries

When a doctor gets the bloodwork back and says all the test results were fine, many of us won’t even bother listening to the numbers that follow. If there’s a problem, however, we’ll be sure to walk out of the office knowing exactly what the tests show for cholesterol or triglycerides or whatever the issue is.

In diagnosing U.S. stocks, Liz Ann Sonders generally has given the all-clear sign during the rally in equities over the past five years. So while she continues to believe the U.S. is still in the “middle innings” of a secular bull market, it’s worth listening when the chief investment strategist at Charles Schwab Corp. talks about a few results in the bloodwork that may signal some short-term sickness.

“When investors hear ‘secular bull market,’ sometimes they think it goes on and on forever without any corrective phases,” she said in an interview on the “Bloomberg Surveillance” television show this morning.

One thing that could cause some problems is an “inflation scare” that would alter the Federal Reserve’s policy on stimulus and interest rates, according to Sonders. She singled out rising rents and non-supervisory wages.


U.S. apartment rents have climbed this year at the fastest pace since the recession, property-research firm Axiometrics Inc. said last month. Effective rents increased 3.4 percent from a year earlier, according to the company. Average hourly earnings for non-supervisory employees climbed 2.4 percent to $20.54 in May from the previous year, according to the Labor Department.

Another short-term concern for Sonders is what she called “frothy” investor sentiment. Last week’s survey of newsletter writers by Investors Intelligence showed bulls increased to 62.2 percent, the highest reading since January 2005, suggesting what the report said was “near fully invested positions amongst professionals.”

“I don’t think you have a lot of room for error,” Sonders said. “I think the market is set up so that if we were to get some sort of problem, geopolitical or inflation scare, sentiment is frothy enough that that probably is a problem for the market.”

Sonders said investors should let their portfolios tell them what to do. In other words, rebalance if stock holdings have grown too large, rather than let her “or any other yahoo” try to time a market correction for them.

“We’re at the fifth birthday” of the bull market, she said. “And 5-year-old birthday parties can erupt in tears at any point.”

Indeed they can. Especially if you wait too long to serve the cake.

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