NEW YORK (Reuters) - The U.S. economy is in the late stages of a decade-long expansion, prompting longtime market strategist Richard Bernstein to worry about a downturn in corporate profitability, and look to faster-growing China to fuel returns.
Bernstein, the chief executive of Richard Bernstein Advisors LLC and a former Merrill Lynch & Co chief investment strategist, said rising costs and waning stimulus from the 2017 federal tax overhaul are among factors likely to dampen corporate results.
There is “potential for a full-blown profits recession early next year,” Bernstein said at the Reuters Global Investment Outlook 2020 Summit in New York, though it was unlikely to mimic 2015 and 2016, when plunging oil prices crippled energy companies.
Bernstein said he has been “very, very defensive, pretty much all year” on U.S. stocks, emphasizing “pretty vanilla stuff” such as consumer staples, healthcare, real estate and utilities.
“We’re not underweight, we’re not under our desks in a fetal position, but relative to a lot of people now who are out there, and relative to our own comments two or three or four years ago, yes it sounds more bearish,” Bernstein said.
While some investors expect cyclical sectors such as industrials and materials to outperform, Bernstein said leading indicators of U.S. corporate profits “do not argue for an overweight of cyclicals” for an extended period.
“It’s not there,” he said. “The data is just not there.”
Conversely, Bernstein said, economic indicators in China are accelerating, leading his firm to be “very overweight” in that country through exchange-traded funds, with 12% exposure compared with 3% for the global benchmark.
“The Chinese government has injected massive amounts of monetary and fiscal stimulus into the economy,” Bernstein said. “To say it’s not going to work is amazingly bearish.”
Bernstein said that one big surprise next year could be that “China is going to do a lot better than people think.”
Bernstein said that in 2020, a strong yen could weigh on Japanese stocks, while Europe “does okay but it’s a positive surprise,” and U.S. stocks “do okay, but probably disappoint.”
Many investors have expressed concern that U.S. stocks could tumble if Massachusetts Senator Elizabeth Warren wins the Democratic presidential nomination, and captures the White House from Republican President Donald Trump next November.
Bernstein said the bigger issue for investors in a Democratic administration is whether that party can avert gridlock by capturing the Republican-controlled U.S. Senate, while also keeping control of the House of Representatives.
“If the Republicans keep the Senate, like, who cares? Calm down,” he said.
“If the Democrats have the House, the Senate, and the White House, it’s a different story,” Bernstein said. “It won’t be the first time you have a major change.... It doesn’t mean there will be no place to invest.”
Reporting by Lewis Krauskopf and Jonathan Stempel in New York; editing by Megan Davies and Diane Craft