Richard Bernstein Warns Fed Policy Could Backfire | ETF Trends

By Ian Young, ETF Trends

With the Federal Reserve reassuring investors that it will continue to support the economy, making moves necessary to bolster markets until they have stabilized, investors have become increasingly confident in both bonds and stocks, driving those markets higher.

“It’s out of an excess of caution to preserve these gains for market function by following through,” Federal Reserve chairman Jerome Powell said during his semiannual testimony before Congress recently. “I don’t see us wanting to run through the bond market like an elephant snuffing out price signals, things like that.”

Can the capital markets anticipate further support action from the Fed? That depends, noted Powell.

“It’s really going to depend on the level of market function. If the market function continues to improve, then we are happy to slow or even stop the purchases,” Powell said. “If it goes the other way, we will increase.”

But one analyst warns that the strategy could backfire at some point.

While most market participants are content for the Fed to continue its efforts, famed investor Richard Bernstein admonishes investors that this unprecedented Federal Reserve intervention may eventually result in some considerable damage, however.

Bernstein explains that near-record deficits and overzealous attempts to boost the money supply represent some of the most significant issues.

“I’m surprised that people aren’t more concerned about what huge monetary growth means for the economy in the United States now,” the CEO and Chief Investment Officer of Richard Bernstein Advisors told CNBC’s “Trading Nation”.

The Fed’s bond purchases are of special concern to Bernstein who believes that when too many investors are finding markets easy to navigate, it can lead to problems.

“They’ve effectively turned the bond market into third-grade soccer,” Bernstein said. “There are no winners or losers. Everybody gets a participation medal, and one has to wonder by taking out the risk-return consideration from a huge market — what that means for misallocation of capital, where a bubble is going to form and things like that.”

Despite his worries, however, the veteran investor recognized the benefits of extreme monetary and fiscal measures in helping to curb to a potential depression-like situation and reinvigorate an economy that has been brutalized by the coronavirus during a very short period of time.

“We all agree we need very thick cushions right now,” said Bernstein.

While Bernstein is still slightly overweight in consumer staples and health care, he has begun to elevate his exposure to economically sensitive groups including energy, materials, industrials, and global small caps in early April. For investors looking to emulate this allocation, ETFs like the Vanguard Consumer Staples ETF (VDC), the Fidelity MSCI Industrials Index ETF (FIDU), and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

The secret, according to Bernstein however, is to eschew speculative plays.

“There’s some pretty nutty stuff going on,” he added. “Certainly in this environment, I think one should be very, very cautious about these high-flyers that have nothing to do with fundamentals at all. It’s all momentum and technicals.”

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