"Break away from the pack" is the theme of this year's American Bankers Association Wealth Management and Trust Conference.
While the "pack" seems bearish on U.S. growth this year, two top investment strategists who spoke at the opening general session of the conference were bullish. About 500 people are attending the three-day conference at the Westin Kierland in Scottsdale, Ariz.
"Watching the stock market last year was a bit like watching a chicken try to fly," said David Kelly, chief market strategist at J.P. Morgan Funds. "There was a lot of noise and motion and up and down and squawking, but in the end, the market ended up exactly where it was and the economy really didn't lift off either."
In 2011, the stock market didn't get much of a boost from the U.S. economy. In addition, events like the Arab Spring, the tsunami and nuclear disaster in Japan, the fiscal crisis in the U.S. and the European debt crisis weighed down financial markets, Kelly told the audience.
But going forward, Kelly sees a different scenario. "If you look at the stock market so far this year, it's much more like an eagle than a chicken," he said. The market is up 11% year-to-date.
While there's no guarantee this trend will continue, Kelly said the economy is growing and risks are diminishing. Demand has increased for automobiles, manufacturing and trade inventories are low, consumer credit conditions are improving, the unemployment rate is coming down and after-tax corporate profits are headed up. "Overall, if we don't get hit by some shock, we think that the economy can grow by about 3% this year as opposed to about 1.7% last year," he said.
Even as Kelly acknowledged there are some good opportunities, he said there are no "screaming buys" in financial markets right now. "But there is a screaming sell and that screaming sell is high-quality, long-duration fixed income," he told the audience.
"The biggest move back to normal we're going to see in financial markets over the next few years is a move back to normal interest rates," he said. That's why Kelly suggested that investors take on more risk and underweight high-quality bonds.
The session's other speaker, Richard Bernstein, founder, CEO and chief investment officer at Richard Bernstein Advisors, also foresaw significant growth ahead for the U.S. "We are in the early stages of a multi-year, I would argue decade-long period, of U.S. asset out performance," he said.
Bernstein doesn't like the prospects for emerging markets. "They have the highest money growth, credit bubbles and accordingly some of the highest inflation rates in the world," he said.
The S&P 500 has now outperformed BRIC equities for more than four years, Bernstein said. "All you hear about is emerging markets and commodities and gold and how horrible things are here in the United States. When there's an overwhelming chorus singing the exact same song, that story is rarely right," he said.
Bernstein said he thinks small-cap banks, which he distinguished from regional banks, will drive the market. He said he liked small-cap banks for three reasons: employment is improving, which he said was good for them; housing is "jelling," although it's not quite solid yet; and unlike the big multinationals, they have no exposure to credit bubbles around the world.
Both speakers agreed the tension between Israel and Iran was the biggest "wildcard." If oil prices increase from $100 per barrel to $130 a barrel due to escalating geopolitical tensions, "That could shave almost a percent off GDP growth this year," Kelly said.
-Leila B. Boulton