Tariffs proposed by President Trump could be the final nail in the coffin for income-oriented investment strategies, according to Richard Bernstein, chief executive of Richard Bernstein Advisors.
In a market update Wednesday, Bernstein reiterated his thesis that the U.S. is entering a traditional late-cycle economic period, characterized by production bottlenecks and increasing inflationary pressures.
“There are already production bottlenecks forming within the economy and pricing power is returning to corporate America,” Bernstein said. “Tariffs are likely to cause prices to increase more than they might normally.”
The threat of tariffs “suggests that income-oriented investors should be much more concerned about inflation than they are currently,” he said.
Sizeable flows into fixed income stopped only recently, Bernstein noted, and disinflation and deflation seem “ingrained into investors’ psyche” even though inflation expectations troughed in June 2016 (followed shortly by the yield on the benchmark 10-year Treasury bond). Bonds and yield-oriented stocks have underperformed ever since.
As a result, investors are ill-positioned for the current period, he said. The risk is not from out-of-control inflation, but instead from income-oriented portfolios set to perform poorly in a late-cycle stage with rising inflation expectations.
Cyclical sectors such as technology, financials, materials and emerging markets typically do well in late phases, according to Bernstein Advisors.