One of the few ways that bonds might conceivably generate a positive return is if the Federal Reserve moves to a negative interest rate regime. Fed Chairman Jay Powell has voiced his opposition to this radical policy.

Arnott said it is possible since both President Trump and some Democrats favor it. “The temptation is bipartisan,” he argued. But if one looks at what’s happened to European bank stocks or the entire Japanese economy, the picture isn’t pretty.

The current political climate is also cause for concern. Former vice president Joe Biden has pledged to raise the corporate tax rate from 21% to 28%, a move that if enacted would translate into a reduction in many companies’ profits of almost 10%, depending on their deductions.

Both candidates also have big spending plans. “One candidate wants to run $2 trillion deficits as far as the eye can see,” Arnott said. “The other wants to run $3 trillion deficits forever. The problem is it’s impossible to tell which is which.”

Arnott is quick to concede that he is a value investor and the past decade has not been kind to him and his brethren in that space. In his opinion, the gap between growth and value is the widest it has ever been.

If one is looking to invest domestically, the beaten value sector is the place to be. Energy, retail and financial stocks all face secular challenges, but he believes these problems are reflected in their prices.

Mega-cap growth stocks continue to extend their dominance of the S&P 500. Research Affiliates conducted a study of Amazon’s long-term value and assumed it would grow at 20% a year for the next decade, and then grow at the rate of GDP.

Why would Amazon’s top line slow to the rate of GDP? At that point 10 years from now, it would be larger than all the retail businesses in the world. The researcher concluded that might justify a lofty P/E ratio of 70 today.

The only problem is Amazon’s current multiple stands at 130. “The [market] expectations during a bubble are for a continued bubble,” Arnott said. “Eventually you are betting against the median outcome.”

First « 1 2 » Next