It’s checkers, not chess

Richard Bernstein, CEO and CIO, Richard Bernstein Advisors LLC

New York - There is an old saying that "It's chess, not checkers," which implies that things are more complicated than one might expect. However, right now we view the markets as being more checkers than chess.

Looking at the macro fundamentals and data, we think investors were too defensively positioned in 2016. Unfortunately, a focus on defensive income rather than on growth ultimately curtailed many investors' 2016 performance.

Now, the stock and bond markets' performances are currently based on a rather simple construct: when in the past has Washington ever proposed significant fiscal stimulus when the economy was NOT in recession? Answer: never. Adding significant fiscal stimulus to a healthy, albeit not robust, economy is virtually unprecedented.

Many have ascribed the markets' performances solely to a post-election surprise, but the performance trends seen after the election actually began in the first quarter of 2016. The markets have been forecasting an improving global economy for 10 months, and not simply for 10 weeks. The post-election acceleration in the stock market's performance, however, strongly supports our point. Why wouldn't the stock market like (and the bond market dislike) this unprecedented situation?

Investors are typically the most bullish regarding an asset class at the peak of that asset class's performance. This past summer's incredible enthusiasm for bonds was a perfect example, at a time when the market was at its riskiest in terms of duration risk.

We've called last summer the "March 2000" for the bond market because just as investors poured into technology shares when those stocks were at their riskiest point in March 2000, investors poured into bonds when the risk to bonds was at its all-time highest. In 2000 it was the "new economy." This time it was the "new normal."

We repeatedly argued in 2016 that the global financial markets have been suggesting that the period of global deflation was slowly, but surely ending. In the U.S., inflation expectations troughed in February 2016 (almost a year ago!), but yet consensus positioning remains largely anti-equity.

Observers always make the financial markets seem more complicated than they really are, and today is no different. The simple reality is significant fiscal stimulus is being discussed when the economy is already healthy. On paper, this would imply stronger stock markets, stronger commodity markets, and weaker bond markets.

Bottom line: All those performance characteristics are indeed happening. It's not that complicated. It seems like checkers.