Richard Bernstein, who predicted in 2012 that U.S. equities might be in the early stages of a great bull market that could exceed that of the 1980s and 1990s, believes this current bull market and global recovery are entering a distinctly different phase characterized by a return of inflation.
Our president may like to "brag" about the 8 percent gain in the Standard & Poor's 500 since Election Day, but many of the factors driving that gain fell into place last February and March, Bernstein told attendees at the Investment Management Consultants Association’s annual Investment Advisor conference in New York this morning. In reality, Trump's election just "accelerated" what was "a smoldering fire" set to spread throughout global markets. All the factors driving stocks for the last three months were there for "three and a half quarters before the election."
Personally, I'd give the president a little more credit, since the proposed cut in corporate taxes obviously is being factored into equity prices (and if it fails to materialize investors could express their disappointment and sell). But Bernstein's views carry more weight than all but a few forecasters. Before he left Merrill Lynch as chief investment strategist in 2009, he was named the best in his field ten times by Institutional Investor and he made their All-American research team 18 times.
Taking a page from President Trump, Bernstein displayed a few tweets in his inimitable style. The first was: "Investors still refuse to endorse bull market. … Sad." Another read: "Many people say bull market is over. … Wrong."
Everyone has focused on the weak GDP growth of the economic recovery that began in 2009 but Bernstein, who runs an advisory firm under his own name managing $3.8 billion, noted that corporate profits have soared to the highest proportion of GDP ever. The surge in profit growth has driven the bull market, and anemic GDP is mostly irrelevant—at least for stocks.
The profits recession that began in late 2014 ended in last year's first quarter without triggering an economic recession, and stocks have been climbing ever since. Global deflation expectations also saw a trough in last year's first half.
For most of this bull market in equities, the bellyachers hanging out in the bond market have ignored the historic surge in corporate profits, claiming that it was easy central bank monetary policy that was artificially inflating stocks. Bernstein said they have been "so wrong" for so long "it hurts." He is clearly correct about equities, but weak GDP growth has translated into slow wage gains, so the average American with $60,000 or $80,000 in their 401(k) plan understandably doesn't feel very upbeat about how things are going. That helps explain why this may be the most unloved bull market in a very long time.
While the bull market is far from over, no one "is geared for the unfolding economic paradigm." Bernstein admitted he wasn't sure of where the global economy is headed, though he sees a few major changes on the near horizon.
President Trump’s economic policies are generally positive, but they are unprecedented at this stage of the business cycle. "When was the last time" when the U.S. was this far into an expansion and "people in Washington are talking about tax cuts and deregulation?" Bernstein asked. "The answer is never." In the past, these policies have been discussed as prescriptions to escape recessions.
This past summer virtually everyone accepted the idea that the New Normal was almost permanent. So one shouldn't be surprised that seven months later, the new normal is history. And we are "not even close to a recession."