The days of putting your money in the S&P 500 and forgetting about it may be in the rearview mirror.
That’s according to Richard Bernstein, longtime analyst and chief investment officer of Richard Bernstein Advisors.
Speaking to Business Insider this week, the portfolio manager said he’s worried about a “lost decade” that could be in store for the market’s most popular funds — especially for heavy, large-cap technology stocks.
He thinks those investments may not perform well for the foreseeable future, given the challenging economic environment, and his downsides include the S&P 500, the benchmark index that has outgrown technology in recent years amid AI hype.
“Remember, there was a losing decade after the tech bubble in 2000. The S&P did nothing,” Bernstein said, referring to how the benchmark index saw weak returns in the years following the 2002 market crash.
Bernstein, whose firm manages $19 billion in assets, said investors should shift their portfolios toward investments that tend to perform well in low-price situations.
He explained several reasons why he thinks the change is underway:
1. The US economy looks like it’s headed for the ‘guns and butter’ era
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The US economy looks like it is entering a price regime similar to what happened in the 1960s, Bernstein noted, a period he described as the “guns and butter” era.
In the 1960s, the government spent a lot of money on defense, which raised concerns about the deficit. Finally, spending contributed to the hot and slow growth of the 1970s, which turned into a recession as oil prices rose to unprecedented levels.
The US is not spending as much on defense as it was during the Vietnam war, but similar worries about the deficit are still hanging in the background, Bernstein said, pointing to the tax cuts and fiscal stimulus in President Donald Trump’s one big positive bill.
“You can’t say it won’t affect the deficit,” he said. “I find it interesting that we are getting the kind of “guns and butter” of today, “he added, predicting that inflation may heat up in the coming years, while real GDP growth is reduced or remains stable.
Inflation concerns have also been fueled by the recent rise in oil prices, with Americans already paying more at the pump.
Concerns about stagflation – a condition where inflation remains high while growth slows – also rose last month.
2. Technology is a market shock
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High quality concerns in the technology sector added to the market’s collective anxiety. The Magnificent Seven – a group of tech giants at the heart of the AI business – now make up a third of the S&P 500.
Much of the confusion has been fueled by billions of AI-powered technology investments, although monetization plans for some firms remain unclear.
Some forecasters are floating a possible stock correction that could rival the dot-com boom. Bernstein, for his part, has warned the market about being similar to the 1990s for years.
“Hedge funds can basically short seven Mags and buy anything and it might look smart,” he said of how firms can respond to a decade of market losses.
Where to hide
Bernstein had several ideas about how investors should structure their portfolios. Here are the properties he would recommend for investors looking to get the best returns in a high-price environment:
1. Quality documents
Value stocks outperformed growth stocks in the 60s and 70s, Bernstein said.
“And we know that investors are overweighting value right now,” Bernstein said.
The group has also outperformed the S&P 500 so far this year. The Vanguard Value Index Fund ETF is up 2% year to date, compared with a 4% loss in the benchmark index.
2. Small caps
Smaller companies also did better in the 60s and 70s, Bernstein said.
Flows to small-cap stocks have also been “unhelpful” in recent years, his firm wrote in a note this week, suggesting that investors were not familiar with the sector.
The Russell 2000 has struggled during the broader market selloff this year, but has outperformed the S&P 500 over the past 12 months. The small-cap index is up 32% over the past year, compared to the S&P 500’s 21% gain.
3. Short time and money
Short-term and cash investments tend to outperform during periods of inflation, Bernstein noted. That’s because, when inflation is high, the market places a premium on the amount of money a person can get now.
He pointed out how stock market funds “dramatically” outperformed long-term bonds during the 60s and 70s.
“I have a 20-year investment or a 10-year investment, but that doesn’t do anything for me today when I need to buy groceries,” he said, adding that the RBA had raised its allocation to cash since the start of the Iran war.
4. Partition documents
“In the equity market, you want dividends because you want as much money up front as you can get,” he said of attractive dividends.
5. Gold
Gold did not overperform during the hyperinflation of the 60s, but it did not perform well, Bernstein noted.
He said he believes investors keeping a small portion of their portfolios in gold is a good idea, adding that his firm has allocated about 5% to the metal itself.
Bernstein floated one portfolio configuration where investors have 60% of their wealth invested in value, dividends and non-US stocks, while 40% is invested in short-term bonds.
“You can do very well in the next five to ten years,” he said.