An Institutional Investor Hall of Famer sees an urgent need for investors to diversify risks as the stock market shows the first signs of overheating.
At least Rich Bernstein, a managing investor, who has spent decades on Wall Street, thinks so. According to him, now is not the best time to enter long positions. We're talking about both the largest technology companies, the cryptocurrency market and long-term bonds. "We are right in maybe the biggest bubble of my career," Bernstein, the CEO and CIO of Richard Bernstein Advisors, said in an interview. He accepts there is evidence that the market bloat is even bigger than the dot-com bubbles and the 2008 global financial crisis. Bernstein believes that "the Fed has so distorted the long-end of the curve that we are seeing a very natural reaction among long-duration assets which is then on a life of its own. "Anybody who's out there in these long-duration assets has to be firmly convinced that long-term interest rates are not going to go up because that's the kryptonite for this bubble," said the manager.
However, not all of Bernstein's predictions hit the mark. Back in June, he said bitcoin remains a bubble, but since then, the cryptocurrency has risen and has already recouped more than 50% of its May decline. Bernstein advised to start diversifying stocks to groups that have price power in the face of inflation. This is especially true for stocks of companies that produce commodities, materials, or are directly tied to the energy sector. But despite his epic warning about the bubble, Bernstein does not predict a general market crash. He views the market as a swing. "We're balancing between these long-duration assets that are very overvalued and a bubble versus the rest of the world," Bernstein said. "Unless liquidity dries up very rapidly, which seems unlikely, the probability of a major bear market is probably much lower than people might think," the manager noted.
And it's high time to recall that the Federal Reserve is not going to resort to an emergency rollback of its asset-buying program, much less reduce its balance sheet before the first interest-rate hike. In the short term, a year or two, the market is safe, at least if everything goes as the central bank predicts and inflation returns to within an acceptable range of 2.0% or so. Until the economy fully recovers from the effects of the coronavirus pandemic, and there are already rumors of another wave this fall, no statement from even such business figures will prevent the stock market from renewing its all-time highs.
As we can see from the chart, the S&P500 index has been balancing around 4,400 points for quite a long time, which indicates a summer pause of the investors before another autumn rally rather than an impending correction. It is quite possible that this week's inflation data will encourage investors to choose a direction. A break through the magic 4,444 level would bring new buyers back into the market and push the index up to historical highs. If we see a correction, it would be to the 4,423 and 4,407 levels.