Richard Bernstein: No, This Isn’t the Stock Market Bottom By John Kimelman Updated April 3, 2020 12:49 pm ET / Original April 3, 2020 10:24 am ET Kate Copeland IN THE MIDDLE OF LAST YEAR, Richard Bernstein and his investment team started pivoting to defense after concluding that the decade-old economic expansion was fraying around the edges. Though the $9.5 billion macroeconomic analysis and portfolio-construction shop failed to predict the sharp, deep market downturn triggered by the coronavirus pandemic, the cautious call is now paying off. “Our biggest portfolio is down about half of the decline of the S&P 500,” says Bernstein. Reached by phone at his New York City apartment, where he is hunkered down with his family, Bernstein tells Barron’s Advisor that we’re probably at the beginning of the bear market, not the end. He explains which piece of data is the key indicator of an economic recovery. And he argues that a V-shaped recovery is wishful thinking. Q: Barron’s: First off, how is your health and how are you handling this period of social distancing? A: Bernstein: I’m fine, other than a little bit of cabin fever, and my family is fine. Q: On February 19 – at the S&P’s peak and just days before the crash began – you were on television issuing warnings about flat corporate profit growth and below-average GDP growth. But you didn’t mention the word “coronavirus” even once. Would you like a do-over? A: I’m not going to tell you we saw the coronavirus’s impact on markets. But we had been reducing the risks in our portfolios for the past six to eight months because we were seeing a deterioration in economic fundamentals. No downturn starts with a weak economy; it starts with a strong economy that begins to fray around the edges. Q: You wrote recently that the coronavirus is a black swan event, which by definition is something that is highly unanticipated. Shouldn’t this have been anticipated earlier by U.S. markets, given that the problem had been building for weeks inside of China? A: That’s what happens when you get a very speculative stock market. At the peak, you get a new normal that things are wonderful. But at Bernstein Advisors, we saw that there was a deterioration of normal economic fundamentals and few seemed to care. I would argue that the coronavirus was just an accelerant on what was already burning embers. Q: Are you saying that the markets wouldn’t have fallen as hard if the economy hadn’t been vulnerable in the first place? A: Exactly. Q: Explain how you positioned your portfolios given your concerns last year about a deteriorating economy. A: The playbook says when fundamentals begin to deteriorate, you head towards defensive sectors such as consumer staples, health care, utilities and real estate investment trusts. We are not absolute-return investors and we don’t short stocks, so it’s going to be up to individual investors as to whether we did a good job or not. But on a relative-return basis, we did well. Our biggest portfolio is down about half of the decline of the S&P 500. Q: What are some stocks that embody this theme of defensiveness? A: Because we are top-down investment advisors, we don’t focus on individual stocks per se. We are about the only true macro firm out there; we either buy ETFs or baskets of stocks that are quantitatively selected – almost forming our own ETFs. We do no research on individual companies. Q: What kind of shifts have you been making to your portfolios as the market’s been falling? A: I am going to give you a very frustrating answer, which is that we’re not an event-driven firm. So we actually haven’t done very much at all in recent weeks, because we want to see how this affects the fundamentals and what our positioning should be given the effect on fundamentals. We were reducing equity exposure last year because the fundamentals were telling us that the market was getting speculative. Q: Looking back at the months leading up the coronavirus-led crash, what actions did you take as an advisor for your clients that you are most proud of and what do you most regret? A: I’m most proud that we were following our process and we were toning down the risk of the portfolios accordingly. We were lowering our equity exposure and increasing our fixed-income weighting, accentuating defensive stock sectors, and maintaining our position in gold. As for regrets, I wish we had gotten even more defensive than we did. Q: Stocks have recovered a bit, thanks to the fiscal stimulus coming from the U.S. government. Is this a sign that they have bottomed? A: Bear markets have three phases they go through: The first is that investors view it as temporary, the second is that it’s worse than anyone could’ve expected, and finally, that it will never end. The fact that investors are still searching for a bottom suggests that we are still in the first phase. Q: What signals in the economy or markets would indicate that the market is ready to turn around? A: Weekly initial jobless claims is a great leading indicator of the economy. It may not be perfect for the market overall, but it does give you good guidance as to whether you should be increasing or decreasing cyclicality in a portfolio. I think if initial jobless claims begin to start improving and can maintain some semblance of a constant improvement for several weeks, that would be your first sign that something is getting better. Q: You have said in the past that investors should be asking what people will be talking about 12 to 18 months from now. Will it be the coronavirus, or something completely different? A: I think it will be something completely different. It will be more about a weak economy. I think the surprise will be that we won’t have a V-shaped recovery; it will be slower than people think. The only question in my mind is whether we have stagnation or even stagflation. Q: So you’re concerned about limited growth combined with inflation, like in the 1970s? A: Yeah, when you think about the amount of stimulus that is being put in the system worldwide, it seems to me that’s a reasonable proposition that you can have more inflation than people think. Q: I know that you, like many others, think that we are already in a recession and that it will be deep because of rapidity of the fall. How bad will it get? A: I think unemployment is going to be an awful lot higher than people could ever imagine. Whether it is 15% or 20% – who knows? Q: What’s the biggest investment lesson you’ve taken from this downturn? A: This has reinforced what I already knew, which is that at the peak of a market cycle, people forget basic fundamentals. They just go wild. They get so bullish that nothing matters and nothing is going to stop this. If you go back and look at the way people were talking this past December and January and even early February, that’s exactly what was going on. Q: Your clients are mostly institutional investors – including fund managers like Eaton Vance and brokerage firms like UBS and Morgan Stanley. How are you communicating with them and what kinds of questions are you hearing? A: We had a big conference call a few weeks ago with thousands of people on the call and we’ve done one-on-ones with some of our biggest clients. I would say the number-one question originally was “How long will this go on?’ Now the questions have shifted to, “Aren’t there opportunities? “ Q: And what do you tell them? A: I say it’s unfortunate that they are asking that question, because usually that question indicates we are not yet at a bottom. Bottoms usually occur when people don’t ask if there are opportunities. At bottoms, people just assume that the horrific performance is going on forever and nobody wants to invest. Q: Thanks, Rich. https://www.barrons.com/articles/ap...ebate-is-whether-to-buy-the-stock-51585945285
That would then require Cryonics along with the company to be most likely a top 500 company to be around long enough to exploit these types of market conditions whenever they appear during the next 1000 years. More importantly, you'll need to have deep enough pockets to pay someone to unfreeze you so that you can trade these types of market conditions whenever they appear. wrbtrader
Going off topic here, but not sure there is much evidence that Cryonics even works. Some speculate that the process of freezing people causes irreversible damage to the brain. Although I guess if you don't believe in an afterlife or do believe in an afterlife, but don't think you'll be going to the good place...any odds of surviving is better than none.
Anyone who has seen freezer burn would be suspicious The only hope is slowing metabolism which some organisms seem capable of doing.
Yeah, I know what you mean about freezer burn. Color changes, smells strange, and taste like. To make room for stocking up on chicken, babyback ribs, frozen vegetables due to the coronavirus pandemic...I needed to clear out some old frozen meat from my secondary freezer. I saw some frozen elk meat, frozen pheasant and duck from last winter. Usually all the meat is cooked up or given away but there was these small pieces remaining. Took them out, let them thaw a little...gave it a good sniff. Barely passed the smell test. Put the slow cooker on and cooked them independently...color was off. Next, took some over to the neighbors house and tried to give it to their dog...he smelled it and walked away. I then tasted (a nibble) of each and almost gagged on it. Tossed it in the garbage but it did make me think about a Cryonics. We will either smell bad, taste bad (in reference to the spouse / oral) and look bad. Yet, when I was a kid...I would deep freeze insects and forest frogs for my science class. Let them thaw out a few days later. They walked around, hop around OK but a little lethargic. Thus, not sure about their brain activity. wrbtrader
Bah, you should have tossed the bad meat into a compost pile. That dirt would be nutrient-rich for next year's vegetable crop soil.
Watch the Netflix series Altered Carbon (the latest season kind of sucks though). Each person has a "stack" that is a small hardware device implanted in their body that stores their consciousness. Seems easy enough