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Stocks to win ‘tug-of-war’ with rising rates, but market bull cautions a 'regime shift' is here

Stocks to win ‘tug-of-war’ with rising rates, predicts market bull Rich Bernstein
Stocks to win ‘tug-of-war’ with rising rates, predicts Wall Street veteran

An Institutional Investor hall of famer doesn't see rising interest rates getting in the way of stock market gains this year.

According to Richard Bernstein, the clash between rising inflation expectations and stronger earnings shouldn't push investors into the bear camp.

"This is a tug-of-war that's very normal in a later cycle environment where you have bad things happening. For instance, the 10-Year [Treasury] yield going above 3 percent. But then you have good things happening," the CEO of Richard Bernstein Advisors told CNBC's "Trading Nation" on Wednesday. "We're not at the point where the number of bad things overwhelms the number of good things."

But that doesn't rule out investors being left in the lurch.

Bernstein, a CNBC contributor who had been Merrill Lynch's chief investment strategist, contends few portfolios are hedged for rising inflation — leaving a majority vulnerable to deep losses.

"It's a regime shift,'' he added. "If you look at how investors have been positioned for most of the past at least five years, if not longer, they've certainly been positioned for continued disinflation and deflation."

Bernstein prefers cyclical stocks right now over income-oriented areas. He's avoiding utilities, telecom and REITs in favor of materials, energy and industrials.

"The question you have to ask is if it's pro-real growth or pro-nominal growth. The answer now is pro-nominal growth," Bernstein said. "What you have to do is look for industries that benefit from pricing power. That would generally be commodity independent industries. It would be very, very cyclical industries."

His thoughts came as the Dow staged an intraday reversal to snap a five-day losing streak. The index rebounded from a 201-point deficit to close up 59 points to 24,083. The also mustered a close in positive territory on Wednesday.

As for the jitters in the markets, Bernstein contends that's not what causes a bear market. Rather, it's too much euphoria — a situation that Wall Street isn't experiencing right now.

"For now, I think it'll pay to stay bullish," Bernstein said.

Rising rates won’t crush the bull market, says Richard Bernstein
Rising rates won’t crush the bull market, says Richard Bernstein