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Liz Ann Sonders: We're in for an "inflation scare"

Liz Ann Sonders, chief investment strategist at Charles Schwab, believes the current bull market has further to go.

However, she admits the second-longest bull market in history has entered a more “mature” phase and predicts that it will be marked by fits of volatility and more frequent pullbacks.

“What is remarkable to me in watching this bull market since its inception [March 2009] is how unloved it is,” Sonders tells me.

She says the muscle memory of the Great Recession has left investors on edge, wondering when the next shoe will drop for the markets. From a contrarian’s perspective, Sonders says that lack of enthusiasm for the current bull market is actually one of its positive underpinnings.

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A 15-year veteran at Charles Schwab, Sonders warned clients about the housing-market bubble in the fall of 2006 and correctly called the market bottom in 2009.

She believes earnings will likely drive this bull market in 2017, but says, “We need to see more nominal GDP growth in order to boost top-line growth for companies.”

Her team currently has a “neutral rating” on US equities and thinks stocks are marginally overvalued on a price-to-earnings ratio. However, she says if earnings start to get a lift, stocks should return to “fair value” territory.

With a slight pickup in wages and some upward pressure on commodities, Sonders believes we are sowing the seeds for higher inflation.

“I think we are at a limited risk of a serious inflation problem, but we’re at a decent risk of an inflation scare,” she says.

Barring some surprise between now and the end of the year—or an even bigger surge in the US dollar—Sonders believes the Federal Reserve will raise interest rates at its December meeting.

Sonders says if Fed policymakers don’t raise rates then, they risk being perceived as “behind the curve” when it comes to corralling inflation. And that, she says, would be a real problem for this bull market.