Coincidentally, last summer the aggregate bond market also sported the highest duration in its history. Tiny Hamilton College, Bernstein's alma mater, sold 100-year bonds.
Many issuers took advantage of record-low interest rates, and near-record amounts of cash flowed into bonds just when they were approaching one of the riskiest levels in history. The only major bond issuer that didn't extend the duration of its portfolio was the U.S. Treasury. Bernstein didn't say it, but former Treasury secretaries Tim Geithner and Jack Lew earned themselves D's or F's for failing to do so, particularly in light of the amount of debt they issued.
Another irony is that President Trump is talking up his pro-growth agenda at the time many Americans are talking about income investments. "That's not the bet" one wants to make with inflation rising in Europe and even Japan, Bernstein said. Maybe so, but with 3.5 million Americans turning 65 every year, it's hard to blame for expecting their assets to thrown some cash.
Something is changing around the globe as the economy in many countries is improving. "It's not the global economy of three or four years ago," Bernstein declared. U.S. stocks are up 8 percent since the election, but Russian equities are up 32 percent, thanks to surging commodity prices. Germany's DAX index also is up 30 percent from last year's lows.
Calling it re-inflation, not reflation, Bernstein postulated the notion that global investors, particularly in the bond market, could be in for major shocks. Could re-inflation be a secular trend that lasts five or 10 years, not the cyclical phenomenon everyone assumes? No one is even asking that question. After years of assuming demographics were destiny and the entire developed world was becoming one giant retirement community like Japan, is a global boom conceivable? No one is bothering to contemplate that outcome.
A longtime bear on emerging markets, Bernstein is changing his tune, albeit with many caveats. For five straight years, emerging markets led the world in negative earnings surprises.
Coming out of a profits recession, Bernstein tends to favor the junkiest of junky companies, noting history indicates they are the best performers in these environments. Still, he laughs when he hears portfolio managers say they like high-quality names in emerging markets.
That's an "oxymoron," he said. "There are about three."
Investors may need to reposition their portfolios if the trend to cyclical growth and low quality companies continues to gain momentum. Bernstein likes deep cyclicals and other industries like energy, materials, financials and low tech. Academic research reveals that great companies can make bad investments because the market has already priced the quality of their earnings into the stock price, while unloved, out-of-favor businesses often outperform because their stocks sell at bargain-basement prices. He suggested this phenomenon might be particularly salient in the next stage of the bull market.
High tech and social media could be victims of rising rates. "When the hurdle rate is zero, Elon Musk wants to go to Mars," and investors are willing to throw money at him. Now another competitor wants to go to Mars and Jersey Transit can "barely make it to Penn Station."