Miller, who made his name by beating the S&P 500 for 14 consecutive years in the 90s and early 00s with the Legg Mason Value fund, thinks the new bull market is in full swing.
‘Clearly the extreme risk aversion that characterised the period from early October to early March is over, and absent some exogenous event or dramatic policy error, it is very unlikely to return,’ he said in his latest market commentary. ‘That has allowed almost all asset prices along the risk spectrum to rise, except Treasuries, a trend I expect to continue, since I think bargains abound in the US stock market.’
‘Bull markets typically begin when the following four conditions are present: the economy is bottoming, profits are bottoming, the Fed is stimulating, and valuations are low. That’s where we are now,’ he says.
He thinks the newsflow from companies will continue to be negative, but believes investors should not become disheartened by this.
‘Those looking for the economic numbers to validate the market’s move higher or for corporate executives to express optimism about the outlook are likely to continue to be disappointed,’ he says.
‘Economic numbers report the past, and corporations observe the present, while the market lives in the future. Corporations always express the most optimism about the outlook at the top, and the most pessimism at the bottom. Markets are about expectations, and expectations about the future are improving, on balance, and so are the markets.’
There are caveats to Miller’s bullish outlook, however. ‘Although the market is up sharply from the lows and the economy appears on the brink of recovery, both can reverse if things don’t continue on the present path,’ he says. ‘I think there are three endogenous risks to watch for: rising interest rates, a sharp rise in commodity prices (especially oil), and policy errors.’
With regards to interest rates, Miller expects medium and long term interest rates on treasuries to move gradually higher and that in six months, yields on ten year treasuries will be around 4%. ‘A sharp rise beyond that, though, could jeopardize a nascent housing stabilization and undermine the budding recovery,’ he warns.
Meanwhile, he thinks the risk of inflation in the coming years is ‘remote,’ claiming deflation is the bigger worry.
Looking at oil, he thinks that should the oil price rise upwards of $80 a barrel, that could also pose a threat to a potential recovery.
He is full of praise for the way the US authorities have handled the financial crisis, and thinks the chances of a major policy error that would strangle a recovery are slim. In addition, he thinks Ben Bernanke should shoulder a great deal of credit for his handling of events.
‘The administration could help the economy, the markets, and its own reputation for good decision-making by announcing immediately its intention to nominate Chairman Bernanke for an additional term leading the Fed. He has done a superb job under the most difficult circumstances. No Fed in history has been more innovative and creative in dealing with unprecedented financial turmoil and global economic challenges. He deserves the nation’s gratitude.’