Volatility is expected to rise in the stock market during the summer, with global geopolitical issues driving headlines. But the secular bull market should nevertheless remain intact, predicted Charles Schwab.
The San Francisco-based brokerage's team of market strategists said in a report that, with limited signs of an impending recession in the U.S., stocks should keep moving higher, although it could be a bumpy road as "ominous-sounding" headlines continue to emerge throughout the summer months. After all, Presidential Donald Trump's tariffs on imported steel and aluminum are being enforced, the relationship between the U.S. and the G7 members is fraying, and it's not clear what will happen with North Korea, despite the historic meeting between Trump and Kim Jong-un.
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"It's nice to have a solid vessel with which to navigate rough waters, and it appears that the U.S. economy is just that," wrote the strategists from The Charles Schwab Corporation (SCHW) in the report. "Consumers are gaining conviction in the economic expansion, with The Conference Board reporting a jump in consumer confidence, while the Bureau of Economic Analysis (BEA) reported that personal spending rose a better than expected 0.6%, continuing a rebound from softness seen earlier in the year."
But it's not just consumers that are confident. Schwab noted that business confidence is up, with regional manufacturing surveys continuing to post upside. The brokerage pointed to the National Institute for Supply Management's manufacturing index rising to 58.7, while the new order reading increased to 63.7. Meanwhile, the ISM non-manufacturing index rose to 58.6, and new orders move higher to 60.5.
The strategy team at the discount brokerage also noted that the personal consumption expenditure, which is a favored measure of inflation by the Federal Reserve, is up only 1.8% on a year-over-year basis. "Still-subdued inflation is somewhat remarkable given the tightness in labor market: payroll growth surprised on the upside with 223,000 jobs added in May, while the unemployment rate dipped to 3.8% – the lowest level since April 2000," wrote the strategists.
As for what the Federal Reserve will do when it meets this week, Schwab expects an interest rate hike. The strategists will also look for signs of what's ahead for the Fed policy. "With near-term inflation risk still fairly benign, and global geopolitical pressures rising, we'll be watching to see if other FOMC members join Minneapolis Fed President Neel Kashkari in believing that rates may already be near the 'neutral rate' – a perceived level which doesn't add to or deter economic growth – and that numerous future hikes may not be needed," wrote Schwab.