Big Tech’s problems can lie in their early innings.
Institutional Investor Hall of Famer Rich Bernstein warns that the tech-heavy Nasdaq is “far more” than 10% less likely in a downturn likely to occur in recent years.
He accuses a rising interest rate backdrop as the main catalyst.
“Everyone seems to know when long-term rates go up that you are not buying long-term bonds. What people forget, however, is that you also don’t want to buy long-term stocks,” said Bernstein, CEO and CIO of Richard Bernstein Advisors, told CNBCs “Trading Nation” on Wednesday. “What is long-term equity? Simply put, it’s one with a high P / E ratio [price-to-earnings ratio]. “
The Nasdaq closed 0.4% on Wednesday at 13,525.20. It’s up about 3.5% in the last five sessions.
However, Bernstein claims the latest strength is temporary, comparing the background to the tech bubble of the late 1990s to early 2000s. Just like during this period, he sees most of the hyped stories in growth names.
“Countless promises have been made about what the future will be like. Those promises came true between 2000 and 2010. By and large, they came true,” he said. “But the tech sector has given you negative absolute returns for a decade.”
Bernstein, who has spent decades on Wall Street and known for his strategy for Merrill Lynch, told Trading Nation last year that he was underweight, including the group’s high-flyers. He was bearish in terms of technology in 2019 as well.
Bernstein suggests that most investors oppose the impending downtrend.
“I don’t think too many tech investors are prepared for negative absolute returns for three, five, or ten years today,” he said.
Bernstein says investors should target cyclical areas that benefit from strong economic growth rather than big tech. He particularly likes raw materials and energy values. The Energy Select Sector SPDR Fund, which tracks energy stocks, has risen almost 37% so far this year. Last year, too, amber liked energy.
“When the nominal economy gets stronger, you want stocks that are very sensitive to that improvement in the nominal economy,” said Bernstein. “This outlook for the next few years will likely favor cyclicals over more secular producers.”
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