Lack of corporate hubris means elongated cycle

When we started Richard Bernstein Advisors roughly five years ago, we thought the US was entering one of the biggest bull markets of our careers. Today, we are likely in the midst of this long bull market. Despite the general consensus that a bear market is on the horizon and investors’ ongoing interest in protecting potential downside risk, we do not think the Fed, investors, or corporations are yet sowing the seeds for the next recession.

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Financial Times - Investors manic for 'disrupter' stocks

Investors rationalised lofty valuations during the technology bubble with theories regarding the "new economy". "Disrupter" companies are today's rationalisation. Investors seem willing to pay outrageous valuations for disrupter companies because the companies are supposedly changing the world and have no relationship to the economic cycle, to Washington or to geopolitical events.

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EM debt seems risky

At RBA, we search for gaps between perception and reality, and this seems to be the case for emerging market debt. Investors have been lured to these securities by their higher yields, yet the underlying economic and currency fundamentals are deteriorating without commensurate widening of spreads.

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Worried about the Downside?

There have been numerous academic studies that suggest investors' reactions to market risk are not symmetric. Investors consistently react more negatively to losses than positively to gains. At RBA, we incorporate this asymmetry in our sentiment work. Data clearly show that no group of investors is currently willing to take excessive US equity risk. Pension funds, endowments, foundations, hedge funds, individuals, Wall Street strategists, and even corporations themselves remain more fearful of downside risk than they are willing to accentuate upside potential.

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Rich Bernstein on "The Nightly Business Report"

Rich discusses the importance of having a financial plan and focusing on the long term on "The Nightly Business Report" on PBS.

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A Classic Barometer

Investors seem a bit too eager to tout emerging market equities. Much as they did with technology stocks during the early-2000s, investors today are looking for the best re-entry point. Data clearly do not support anymore the notion that emerging markets are a superior growth story, yet investors seem to be ignoring the classic warnings signs for fear of missing out. One such classic warning sign is the slope of the yield curve. Historically, steeper yield curves have been reliable forecasters of stronger overall nominal economic growth and stronger profits growth. While US yield curves remain extraordinarily steep, emerging market yield curves tell a very different and disconcerting story.

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The Importance of Beta Management

Morningstar recently released "Mind the Gap-2014" which demonstrated that investors are generally very poor beta managers. The Morningstar data showed that investors' performance lagged that of their funds by about 250 basis points per year for the past ten years because of poor beta management, i.e., investors tend to be very poor allocators of capital. Beta management is the core of RBA's strategies, and we decided to reissue our 2011 report on beta management in light of these Morningstar data.

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American Industrial Renaissance Revisited

We first wrote about The "American Industrial Renaissance" in 2012, and it remains one of our favorite investment themes. We continue to implement this theme through small US-centric industrial companies and small financial institutions that lend to public and private industrial firms. It remains unlikely that the United States will be the manufacturing powerhouse that it was during the 1950s and 1960s, but many factors are suggesting that the US industrial sector will continue to gain market share.

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