The average investor has been diagnosed by many Wall Street watchers as suffering from a bout of complacency, but Richard Bernstein has a second opinion.
The veteran strategist said he sees no signs of the kind of investor behaviour typical of stock bubbles, no stubborn faith in the market despite portents of doom.
On the contrary, volatility has been so low because investors have been consistently cautious, he said.
"We don't see anybody being aggressive. We can find no investor group that is complacent," he said. And it's the prevalence of risk aversion that might actually sustain the bull market and keep a correction at bay.
Mr. Bernstein spent two decades at Merrill Lynch, rising to become chief investment strategist before starting his own investment management firm – Richard Bernstein Advisors – in 2009. He uses a top-down approach to investing, the first step being a broad assessment of the market. And in today's market, in contrast to the late stages of a market cycle, he still sees fear playing a prominent role.
For individual U.S. investors, there have been 15 straight weeks of outflows from mutual funds. Hedge funds are skewing slightly bearish. Wall Street strategists are recommending going underweight on equities. And, citing a recent Financial Times article, he said institutional investors have reduced their U.S. equity allocation for 11 straight quarters.
He said this is a much healthier bull market than those concurrent with economic booms. "People get lured into booms. They lead people to do silly things that sow the seeds of the next recession."
Some market observers have become concerned that investors have pushed valuations too high, but Mr. Bernstein sees average price-to-earnings multiples on U.S. stocks as appropriate, given the low level of inflation.
"We're having a tough time figuring out why we're in the final minutes of the bull market," he said. "What really causes bull markets to end is a significant withdrawal of liquidity or deteriorating fundamentals. We don't have either of those."
Decidedly bullish on U.S. stocks, Mr. Bernstein has identified industrials as his sector of choice, playing off what he calls an "American industrial renaissance."
The resurgence of U.S. manufacturing, he said, is predicated not only on the North American energy boom, but on a sector that has made itself leaner and more productive.
To concentrate his exposure to the United States, he favours small and mid-cap manufacturers, rather than larger companies with foreign sources of revenue.
He wants limited exposure to emerging markets, which he sees as stricken by high inflation, excess money growth and, in many countries, "a miserable secular outlook."
He doesn't like Europe much right now, either, unimpressed as he is by the European Central Bank's inaction, despite the threat of deflation and pockets of recession.
His interest in Canada, meanwhile, is limited to his product offerings, having launched a fund this week with Toronto-based Redwood Asset Management.
But Mr. Bernstein doesn't have much interest in actually investing in Canada, which he sees as a commodity play.
"As the cycle matures, there will be plenty of time to play commodities," he said. "We don't think it's the right part of the cycle to play Canada." Instead, investors might be wise to wait until later, when credit growth spurs commodity prices, he said.
His bet is on the continuation of the U.S. bull market. Now in its sixth year, many are nervous that the market is overdue for a correction, but the duration of the rally alone doesn't ensure its demise, he said. Plus, that nervousness has served to deter irrational exuberance and keep valuations in check.
"Yes, it's up dramatically, and yes, we can have corrections, but we still argue that stocks are at least a reasonably, if not very attractive asset class."