Asset managers would be wise to boost their holdings of equities, most especially U.S. small- and mid-cap stocks, because of the bull market and “American industrial renaissance” now underway.
So said Richard Bernstein, principal of Richard Bernstein Advisors LLC and presenter of a morning general session – “Fear and Indecision: Sounds Like a Bull Market – at the Investment Management Consultants Association conference in Manhattan, New York.
Underpinning the positive outlook for U.S. equities, said Bernstein, are continuing economic growth, improvements in U.S. business and economic indicators and (counter-intuitively) investor uncertainty that the current run-up in stock valuations can be sustained beyond the near-term.
“There are tons of opportunities in equities markets now,” said Bernstein. “We’re in the middle of the biggest bull market since the great bull market of 1982, yet most people don’t realize this.”
The reason, added Bernstein, is that most investors fail to identify bull markets on the upswing. Between 1991 and year-end 2011, he noted, the average investor enjoyed less than a 2 percent return on their portfolios, a yield inferior to that of some 30-plus asset classes over the same period.
Bernstein attributed investors’ failure to identify the bull market of 1982 and the one now underway to several factors. He noted that 30 years ago, as today, people avoided equities because of fears about rising inflation, runaway federal budgets and debt, low corporate profit margins and inappropriate (too tight in the 1980s; too loose now) Fed monetary policies.
Other concerns of investors today, as during the early 1980s, Bernstein added, are fears about the negative economic impact of high oil prices; low gross domestic product growth (0-2.5 percent in both eras); anti-growth tax policies, sovereign debt crises (Europe’s currently; Latin America’s in the 1980s), and seemingly out-of-control federal entitlement programs, notably skyrocketing spending on Social Security and Medicare/Medicaid payments.
Overriding these issues, said Bernstein, is uncertainty about the future performance of equities. To the extent investor concerns (real or perceived) about the negative impact of business and economic indicators increase this uncertainty, then the “risk premium” – the return in excess of the risk-free rate of return that an investment is expected to yield – also rises. Thus, high risk premiums should make the equities markets more attractive, not less.
“Because of the tremendous uncertainty prevalent among investors, the risk premiums of U.S. equities now are huge,” said Bernstein. “That translates to historically cheap stocks and mutual funds – and hence great market opportunities.”
Bernstein added that he views the concerns now top-of-mind among investors as more imaginary than real.
He pointed out, for example, that an “American industrial renaissance” is now underway, one reflected in the rising values of U.S. small- and mid-cap stocks, because of “wage compression” (declining real wages) and rising, technology-fueled worker productivity that are making U.S. business – among them U.S. manufacturers – more competitive in world markets.