Strategist Richard Bernstein has a compelling way to frame his bullish forecast for 2013: The U.S. bull market in stocks could ultimately rival the one seen in 1982.
That’s not an easy comparison. While the S&P 500 has risen 110 per cent over the past three years and nine months, the benchmark index rose 1,400 per cent over 17 years starting in 1982. And if Mr. Bernstein is limiting the extent of the 1982 bull market to the Crash of ‘87 – which avoids the bubble years of the late 1990s, when Mr. Beinstein was famously bearish – the gains are still an impressive 230 per cent over five years.
So what has made Mr. Bernstein, who used to work for Merrill Lynch before forming Richard Bernstein Advisors, so keen on stocks? It comes down to three themes (via Pragmatic Capitalism and Abnormal Returns ):
- Sentiment: “Continued outflows from U.S. equity funds; Wall Street Strategists’ recommending the most bearish equity asset allocation in nearly 30 years.”
- Valuation: “According to our models, the U.S. equity market is presently discounting 5 per cent-6 per cent inflation for the next 12 months, which seems very extreme to us.”
- Liquidity: “The Fed has told investors that they will continue to provide liquidity and will be slow or late to tighten.”
In particular, he believes that U.S. stocks will outperform emerging market stocks because U.S. corporate profits are the world’s healthiest. He also believes that a wave of mergers and acquisitions will begin in the United States – and not only because companies are sitting on mountains of cash.
“By hoarding cash, larger U.S. companies have under-invested for future growth,” he said. They may start buying growth in 2013 if the economy continues to improve.”