Richard Bernstein, who use to be the Chief Investment Officer at Merrill Lynch before starting his own firm, has released his 2010 predictions. I am making note of it so we can revisit at the end of the upcoming year. Richard, who use to work with David Rosenberg before he left for Gluskin Shiff in Toronto, have gone head-to-head recently about the upcoming forecast. Even though these two are friends and worked at Merrill together, their views are almost diametrically opposed. I side with Rosie.
But, here are his views:
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1. Stock and bond market returns in the US will again be positive.
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2. The US dollar is likely to meaningfully appreciate once market-driven short-term rates begin to rise.
3. US dollar “carry trades” could get killed as 2010 progresses and the US dollar appreciates. Once accounting for leverage, hedge fund performance will likely trail long-only equity performance.
4. The Fed will spend the second half of the year trying to catch up to, and flatten, the yield curve. Short-term rates could increase more than investors currently think. Long-term rates could rise quite a bit in the first part of the year as inflation finally begins to appear, but are likely to fall during the second half of the year when the markets realize the Fed is serious about fighting inflation. The curve is likely to be much flatter one year from today than it is currently.
5. Corporate profits are likely to explode to the upside during 2010. Trailing four-quarter S&P 500 reported earnings growth could exceed 100%. Investors still seem to be under-estimating the operating and financial leverage that is built into corporate profits.
6. Employment in the US will probably continue to improve. Consumer Discretionary stocks will likely be among the best performing sectors.
7. Treasuries will probably underperform stocks. That underperformance is unfortunately likely to reinforce both individual and institutional investors’ views that it is wise to be under-diversified.
8. Small cap value, I think, will be the US’s best performing size/style segment. Small banks outperformance might be the biggest surprise for 2010.
9. Financial regulation will progress, but the bull market will probably aid politicians’ “forgetfulness”. As a result, new regulation could be relatively meaningless. In my opinion, serious regulation won’t occur until after the next downturn, which could be worse if no meaningful new regulation is implemented in 2010.
10. I think the Democrats will do better in the 2010 mid-term elections than people currently think they will. It seems very likely to me that in December 2010, investors will look back on the year and realize that monetary and fiscal policy stimulus still works.
The comment that most amazed me was reported corporate profits will exceed 100% in the coming year. Based on estimates for the fourth quarter of this year, reported earnings are expected to be $46.39 for 2009. This means he expects earnings for 2010 to reach $92.78. Just looking at the best four consecutive quarters during the real estate/credit boom of 2002-2007, the earnings were $84.93 (from 9/30/06 through 6/30/07). So Bernstein expects corporate profits to be 9.25% better than the peak of the bubble. That is a pretty bold prediction. It would be as if the structural problems we have no longer matter at all. We would experience the largest annual profit increase in history. Personally, I think he should have stopped at two martinis for lunch when he was finishing his annual predictions, but we shall see.