Back in 2011, Richard Bernstein was convinced that U.S. equities were enjoying the dawn of a new bull market that would rival the secular surge in stock prices that characterized the 1980s and 1990s. On a conference call yesterday, Bernstein didn’t predict an end to the 2009-2019 bull market, but he did outline a view of the next decade that would look very different from the present.

Bernstein noted that each of the previous four decades looked very different from the preceding period. The bull market of the 1980s began with equities priced extremely cheaply, and that spawned a surge in value stocks, spawning a frenzy of takeovers of undervalued businesses. In the 1990s, the advent of the Internet created a tech stock boom that turned into a first-rate bubble.

For the next ten years, U.S. equities barely managed to touch their 2000 highs, while emerging markets boomed thanks to China’s modernization. Then, to the surprise of most experts, the last ten years turned into an all-American decade for equities.

Bernstein's opinions carry significant weight on Wall Street. He spent several decades at Merrill Lynch and was voted Wall Street's top market strategist 18 times.

In 2010, American stocks were “very out of favor,” Bernstein noted. “Today people are saying where else would you invest.”

Bernstein believes investors are witnessing the “beginning of the end of globalization” as international trade contracts. He produced a Trade Policy Uncertainty Index that revealed a huge spike since President Trump’s election. The only other spike came in the early 1990s following the collapse of the Berlin Wall and the signing of the Nafta treaty and that uptick was smaller.

What investment benefitted the most from globalization, Bernstein asked. Probably emerging markets and technology.

Yet the performance of these two groups in the last two decades were nearly mirror opposites. Bernstein rolled out charts of the performance of venture capital-backed companies for each of the last two decades. From 2000 to 2009, emerging markets trounced VC-backed companies, the latter of which floundered for almost a decade after the tech bubble burst in 2000.

Then things reversed dramatically. “In 2009 and 2010, everyone said you have to own emerging markets for growth,” Bernstein noted. But VC-backed companies went on the generate 20% annualized returns for the next decade, while emerging markets produced paltry 2% or 3% returns.

Bernstein believes the tables are turning. “Recently, four companies [have been] competing to go to Mars,” he observed. “People are wary of emerging markets. We think it reverses.”

Bernstein said China is the market with “most momentum entering 2020” thanks to the stimulus provided during the trade war. “Now it is starting to turn up,” he said. While emerging markets could be likely to follow he was reluctant to give that asset class the green light. “The data in China is encouraging but it hasn’t spread to emerging markets yet,” he said.

Inflation is another area where Bernstein is taking a contrarian position. “Tariffs by definition are always inflationary,” he said. Moreover, the upward sloping trend in the Consumer Price Index is the highest in 10 to 12 years.

“Consumer inflation expectations are at an all-time low,” he added. “We’re not expecting” high inflation in the 4%, 5% or 5% percent area, just higher inflation than most people are expecting. Under that scenario, TIPS could surprise investors on the  upside.

One reason most of his portfolios are holding gold that it is also a hedge against uncertainty. “Gold did very well in 2019 even though there wasn’t a lot of inflation,” he added.
 

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