David Rosenberg – The Consensus is Wrong about Stocks, Bonds and Inflation

This article is based on a presentation from John Mauldin’s 2021 Virtual Strategic Investment Conference, which is being held from May 5 to 18. To register for this conference, click here. The Strategic Investment Conference was just approved by CIMA and CFP for 19 hours of continuing education credits.

The consensus is that U.S. equities will deliver strong performance as the economy recovers, and that higher inflation will drive rising interest rates. All of that is wrong, according to David Rosenberg.

The Toronto-based Rosenberg started his own economic consulting firm in January 2020, Rosenberg Research & Associates, after working a decade as chief economist and strategist at Gluskin Sheff & Associates. He was the opening speaker at this year’s Strategic Investment Conference, hosted by John Mauldin.

Before you place too much weight on Rosenberg’s analysis, recall that he delivered the opening keynote at this conference last year, when he proclaimed that U.S. equity market bulls were in “fantasyland.” He was wrong. The return for the S&P 500 for the last year was 56.25%.

The “fiscal juice” from stimulus checks and the re-opening of the economy are outstripping supply, creating temporary inflation. Supply will catch up when demand subsides as the effect from the stimulus wanes, according to Rosenberg. That will happen before the end of the year.

When the effect of stimulus checks expired last year, GDP declined by 2.5%. We will see a repeat of that this year, according to Rosenberg.

Inflation is not a temporary phenomenon; it is a process of ongoing acceleration in the price level. We don’t and won’t have a trend of inflation, Rosenberg said. Fed Chairperson Jay Powell will be right that inflation will be transitory, he said, just as deflation was a year ago when the pandemic began.

“The worst thing anyone can do is to extrapolate to the future,” he said.

Rosenberg recalled one of Bob Farrell’s classic market rules: When all the experts and forecasts agree, something else is going to happen. The consensus has never been more lopsided, he said, and that is reflected in asset allocations that heavily weight stocks relative to bonds.