Two well-known economic commentators-former Merrill Lynch chief investment strategist Richard Bernstein and economist Ed Yardeni-provided relatively positive outlook for the U.S. economy and equity markets before more than 300 attendees at the 2nd Annual Fiduciary Gatekeeper Research Manager Summit.
The conference, sponsored by Financial Advisor and Private Wealth magazines, was held October 11-12 in Boston and also featured keynoters Meredith Whitney, chief executive officer of the Meredith Whitney Advisory Group; James Grant, founder and editor of Grant's Interest Rate Observer; and Peter Schiff, CEO of Euro Pacific Capital. The summit is designed to give research and investment managers a chance to meet in small groups with portfolio managers, who discuss and answer questions about their strategies.
Bernstein, who was named top investment strategist by Institutional Investor 10 times and now is CEO of Richard Bernstein Advisors, told the crowd that he believes the U.S. equity markets are in the early stages of a bull market that could surpass the greatest bull market of his lifetime, the 1982-1999 market.
In outlining his contrarian scenario in detail, Bernstein said that bull markets are often conceived in periods of widespread fear. Bernstein recalled that from 1982 through 1987 the issues spooking investors bore an eerie similarity to the present moment.
Chief concerns in the early 1980s included shrinking corporate profit margins, entitlements and federal budget deficits, which were setting all-time records. A runaway Fed under Paul Volcker was raising interest rates to unprecedented levels and acting completely on its own will. Even if its objective, squashing inflation, was very different from that of today's Fed, its controversial behavior was not very different. In 1985 and 1986, everyone fretted about a "growth recession" when GDP expanded at an anemic rate fluctuating between 0% and 2%.
Today, federal and state debt dominates the national conversation. Yet Bernstein noted that total debt, including household, corporate and other private debt, is falling at the fastest rate in history.
With the S&P 500 up more than 100% from its March 2009 low of 666, many people are asking if the bull market is over. Bernstein cited the absence of three classic bear market signals-yield curve inversion, extreme overenthusiastic sentiment, and lofty valuation-as evidence the bull market is young. He guesses that "we are in the third inning."
Yardeni, who is president of Ed Yardeni Research, said the U.S. economy could surprise investors with more strength than they expect in this year's fourth quarter.
It was clever of Federal Reserve Board chairman Ben Bernanke to target mortgage-backed securities purchases with QE3 just when the housing market is beginning to turn around, Yardeni added. When it does, Bernanke "can take credit for it," he said. "The markets do very well when Bernanke gives us more drugs."
However, he added that he viewed QE2 largely as a failure. Although it contributed to an increase in equity prices, it also drove up food and energy costs, resulting in a reduction in real disposable income for many Americans.