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Bull run isn't done... yet

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The Dow Jones Industrial Average (^DJI) is up more than 120% since February 2009 and one leading market analyst sees more upside to come, despite recent signs of weakness in the economy.

Charles Schwab Chief Investment Strategist, Liz Ann Sonders, says the bull run stocks have enjoyed for the last five years is not over yet. “I think what started five years ago was the beginning of a secular bull market, not just a cyclical bull within an ongoing bear.”

Stocks largely have shrugged off disappointing economic news, including weak job creation, slower manufacturing and slumping consumer confidence. The S&P 500 (^GSPC) has been hovering at or near record highs in recent weeks, trying to break through the 1850 mark, a level that traders are watching closely. If stocks can surpass that level, many Wall Street analysts believe that will set up the next phase of the bull market and 1900 won’t be far behind.

One debate raging on Wall Street is over whether stocks are rallying on honest optimism about the economy or whether the rally is based on the expectation that bad economic news will lead the Fed to reconsider its taper policy, and decide to continue to pump money into the economy.

Sonders believes it’s the former and that recent economic weakness is largely weather-related. “There is a lot of indication that this has been very dependent on the weather, but I also think we’re well past the point where the market is going to rally on negative news.” As far as theories that the market is up on the expectation that the Fed will have to rethink its course in response to economic news, Sonders isn’t buying it. “I think the market wants to see tapering. I think it wants to see monetary policy move toward normalization and we are well past the point where a Fed having to open up the bazooka again would be good for the market.”


So just how much of a factor will the weather be? The drop in temperatures already has had an impact on several important sectors of the economy, including manufacturing, auto sales, retail sales and housing starts, to name just a few of the reports that have cited the frigid winter as factor in overall results so far this year.

What remains unclear as of mid-February - only part of the way through the winter - is how long and how deep an impact the weather will turn out to have when it comes to the economic recovery that was just starting to really take off in the second half of 2013.

Sonders says the longer the weather impact wears on, the less output is made up and this one has already worn on for a couple of months. “The question is how much of the lost output gets made up,” said Sonders. “If you look at the history of lengthy periods of weather-hit economies, it tends to be about a 75% to 80% recovery in the next quarter or two from the pent-up demand from the lost output.” So the big freeze will hurt, but it might not kill the recovery.


Other than the weather, the factor most on traders’ minds is monetary policy and whether the Federal Reserve will choose to change its plans based on the weather, the slow-pace of job creation or persistently low inflation.

Inflation is not yet a cause for concern, according to Sonders. She believes the Fed’s more immediate focus is on the labor market and the target of 6.5% unemployment. The Fed has said interest rates will remain low at least until unemployment reaches that level. Perhaps unexpectedly, the unemployment rate already has fallen to 6.6%, just above the Fed’s target rate.

Sonders says that will change things for Federal Reserve Chair Janet Yellen and her policies over the next two quarters. “The Fed will have more of a near-term focus on its jobs mandate and I would expect, as most people do, that they move to more qualitative guidance given that we are I think imminently going to hit that six and a half percent threshold on the unemployment rate.”

Yellen is scheduled to testify before the Senate Banking Committee tomorrow, after her original testimony was delayed by – what else – a winter storm in the nation’s capital. Investors will be watching to see if Yellen’s comments or tone reveal any shift since her last testimony before the House Financial Services Committee two weeks ago.