Are fears about the stock market's valuation justified or is the market climbing a wall of worry? If it was a burning question back in December 2012, when Richard Bernstein, a former chief investment strategist at Merrill Lynch and now strategist at his eponymous advisory business, issued his well-known report with his answer, it's a raging conflagration today.

Two and a half years ago, after analyzing four market indicators, Bernstein—who had irritated his bullish peers in the 2000s by being famously pessimistic leading into the crash and the Great Recession—concluded that the bull market was intact. With the Standard & Poor's  500-stock index up some 50 percent since then, and U.S. Federal Reserve Chair Janet Yellen warning just last week that stocks and bonds are richly valued, we asked Bernstein to revisit his 2012 analysis to see what it says about the market now.

The Wall Street Sentiment Indicator

Bernstein, who has tracked the consensus recommended asset allocations of Wall Street strategists for almost 30 years, says they’re a reliable contrary indicator. He compares the consensus equity allocation for a balanced fund—which splits assets between equities (U.S. and international), bonds, and cash—to the typical long-term recommended equity weighting of 60 percent to 65 percent for such funds. 

December 2012: Strategists recommended the lowest equity allocation since Bernstein had tracked the data—about 44 percent in equities.  “At no time in this bull market have they suggested overweighting equities,” says Bernstein. He was recommending 65 percent to 75 percent in equities in moderate portfolios.

Now: The consensus still shows an underweight in equities, he says, although it’s less extreme, at 52 percent. Bernstein’s recommended weighting, meanwhile, has slid to about 60 percent, with a 35 percent exposure to U.S. equities. That's down from an 85 percent exposure to U.S. equities several years ago, he says.

ISI Bond Manager Survey:

The Treasury market climbs a wall of worry, too, says Bernstein. To measure whether that fear is overdone, he looks at a survey of weekly bond manager portfolios from Evercore ISI (which was ISI Group in 2012). He wants to see the percentage of managers who say the duration of their portfolio is longer than that of their benchmark index—in this case, the 10-year Treasury note.

Duration measures how sensitive a portfolio is to a rise or fall in interest rates. If duration is shorter than the benchmark, it means managers expect interest rates to rise, and vice-versa.

December 2012: Bond managers kept their duration shorter than the benchmark, so were positioned for rising rates. "Bond managers have never in the history of the survey positioned for falling interest rates," wrote Bernstein. His view was that rates would keep falling.

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