Recent upheaval in the financial markets is creating new risks and opportunities, and investors should rethink their asset allocations to capture these trends, according to two market strategists.

Richard Bernstein, CEO and chief investment office at Richard Bernstein Advisors, said on Tuesday that we’re at the beginning of a major paradigm shift in the markets. As such, his firm has made major allocation changes in some of its funds.

“We’ve gone from being about 80% in the United States 10 to 12 years ago versus the benchmark being 40%, to now we’re about 50%-55% where the benchmark is 50%,” he said during a panel discussion at the Exchange ETF conference in Miami Beach.

“Our non-U.S. allocation has obviously gone up,” he continued. “Our cyclical allocation is also very high right now because in a rising rate environment you’ll have to have near-term earnings growth to offset the incremental negative of rising rates. Long-term stories do nothing for you in a rising interest rate environment. That’s how our portfolios are structured right now.”

Bernstein elaborated on his belief that long-duration assets aren’t the place to be. 

“I think we’ve had a bubble going on in what commonly are called long-duration assets,” he explained. “That could be long-duration bonds or long-duration equities, which are high p/e equities. The bubble is going on because of the Fed’s quantitative easing where it bought Treasurys.”

He noted the Federal Reserve owns more than half of the 10- to 20-year Treasury market as part of its bond buying program aimed at lowering long-term interest rates in order to stimulate the economy during the Covid-fueled recession in 2020.

“By artificially depressing the 10-year they’ve artificially inflated the valuation of anything priced on the long end of the yield curve,” Bernstein said. “So any long-duration asset right now is overvalued.”

And he believes long-duration assets have been the core of many investor portfolios.

"The economy is changing, so shouldn't your portfolio change to mimic what's going on with the global economy?” he asked. “You can’t expect the old leadership to be the new leadership in a new type of economy.”

Overseas Investing

Bernstein offered that the slowdown in equities probably won’t be as dramatic outside of the U.S. largely because many overseas markets didn’t have as big an upswing in price appreciation. And he noted the Chinese central bank is now easing on interest rates as other central banks are tightening, while Japan historically has been a safe haven.

“There are different ways to think about what’s going on,” Bernstein said. “When you think about commodities, why not look at commodity related markets whether they be emerging or developed. That could be Canada or Australia, or Brazil or Chile. You have to accept the notion that the world is changing, so the leadership among nations will change as well,” he said.

Cameron Dawson, chief market strategist at Fieldpoint Private Securities, is more cautious about jumping on the international bandwagon.

“We haven’t been willing to go overweight in international and emerging markets yet,” she said. “We acknowledge the story about demographics and where the growth comes from in the world, which is certainly the emerging markets. But we use the charts to tell us what the market thinks about those stories on a real return basis. And the challenge we have is that when you look at the relative performance of international developed or emerging market indexes they are in distinct and unrelenting down trends versus the U.S. You have brief moments of outperformance, and then it rolls over.” 



She noted those down trends have been in place for 12 years for developed and 15 years for emerging markets. She acknowledged the favorable valuation differences for non-U.S. markets versus the U.S. market during the past five years, but doesn’t believe the valuation differentiation by itself is enough of a catalyst for international markets on the whole.


Another challenge Dawson sees in international markets, particularly in emerging nations, is a declining trend in governance.

“One of the big drivers of the E.M boom in the early 2000s was it was going from poor governance to good governance and that could be a strong driver of earnings, while at the same time you had China industrializing and you had a weak dollar and a blow-off top in U.S. stocks,” she said. 


“I think there’s still a good argument for having [international and emerging markets] in a portfolio for diversification,” she added. “But we think it’s too early, and until you see the whites of their eyes in this relative performance trend we’re willing to be patient because without that we fear we could continue to be caught in a value trap.” 

On the domestic front, Dawson sees downside risk from the U.S. consumer.

“It seems like a fool’s errand to bet against the U.S. consumer, but it seems signs are fraying on the lower end of the consumer spectrum,” she said, adding that two-thirds of the $2.5 trillion in extra savings everyone is counting on to buffer consumer spending in a high-inflation world is held by the top 10% of households, meaning that the majority of people don’t have that buffer. 



“And here’s the thing that’s wild: real wage growth has been negative for a year, which means that wages have been growing slower than prices for a year,” Dawson said.

She noted that consumers are opting for lower-priced items, and that the pull-forward into goods during the Covid period has ended.

“Does that necessarily get rotated into services?” she asked. “Not necessarily if people are tightening their belts, but I think it’s an opportunity to avoid some of the goods part of the economy.”

The defense industry, where leading names are trading at a 15% to 20% discount to the market, is one area that Dawson said she likes..

“There is something interesting there when you think of areas where you can hide out as staples have inflation problems,” she said. “Maybe there are opportunities in utilities and other areas. Defense seems like one area that’s not getting a lot of love.”