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

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 S&P 500 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.

Vote to see results
Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more