By Michael Santoli

Is today’s economy “just right” for cozying up to stocks?

Liz Ann Sonders, chief investment strategist at Charles Schwab, says today’s economic storyline should support continued higher stock prices.

“There’s a lot of amazement that the market has done so well,” Sonders says in the attached video. “But in some ways, we used to call a slow growth and low inflation environment ‘Goldilocks.’”

While she wouldn’t go so far as to herald the return of Goldilocks, Sonders says stocks have historically tended to thrive as the economy settles into “a slow, steady state” of expansion.

“I actually would be more concerned about the market if the economy really started to ramp here, because of what it would do in terms of Fed policy,” she says.

Much quicker growth would have inflation percolate and drive the U.S. unemployment rate down toward the Federal Reserve’s threshold of 6.5%, which would spur policy makers to rethink near-zero interest rates. The Fed is assuming unemployment won’t get to that level until perhaps mid-2015, which suggests investors have plenty of time before they have to worry about the Fed reversing its extraordinarily generous monetary stance.

If the economy and job growth do begin to gather momentum, Sonders believes it will be because deferred corporate capital investment can pick up, manufacturing is in recovery mode, domestic oil-and-gas production is surging and, crucially, housing provides some oomph to economic growth.

Sonders raised some warning flags on the housing market in 2006, based in large part on the decline in the NAHB/Wells Fargo Housing Market Index of homebuilder sentiment. This indicator has registered a historic surge in the past year. The initial effect is an acceleration in home sales, which is ongoing.

Less-discussed is what it foretells about employment. Sonders says the HMI, “with a 15-month lag, has a very high correlation to the unemployment rate.” We are just now at the point, 15 months into the index’s sharp rebound, when it should start translating into a jump in housing-related jobs. She points to estimates that housing-related activity could start producing 700,000 to 750,000 new jobs at an annual rate, or about 50,000 a month atop the past year’s monthly pace of about 150,000.

“If the trajectory does pick up, then the debate heats up, as far as an exit strategy for the Fed,” she figures.

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