Bernstein and other Eaton-Vance managers offered divergent opinions on several issues. “Profits, not politics, drive the markets,” he declared
Gaffney disagreed, saying politics is a “bigger part of investing than it was 20 years ago” and that is primarily due to fiscal policy. The U.S. is in the middle of a transition from monetary policy to fiscal policy as the major driver of the markets, she added.
Gaffney believes the effects of fiscal stimulus are still in the pipeline and will drive interest rates higher. Investors must “make a decision about how a secular rise’ in rates will influence their portfolio decisions, she said.
In her view, this means competition for capital and other resources will increase. Gaffney also said she was confident the U.S. economy could handle a sustained rise in 10-year Treasury yields to the 4 percent area.
On the subject of China, Gaffney voiced concerns about the world’s second largest economy opening up its capital markets to foreigners. There is “no rule of law’ and they are “transferring country risk to foreign investors,” she said. As a fixed-income investor, that’s scary.
On inflation at least, the fearmongers may have a real concern. Gaffney did agree with Bernstein that all financial markets are way too complacent about the ability of inflation to stage a comeback.
It might be the single-biggest risk facing investors and the reason why investors chasing income could be in for a rude awakening, Bernstein said.
Gradual increases in interest rates are good for equities, Gaffney said. Bernstein added that the 10-year Treasury bottomed out at 1.35 percent and now stands at 3.15 percent—the same exact numbers, just rearranged.
Meanwhile, the stock market is up. “Rising rates themselves are not a catalyst for bear markets,” Bernstein noted.