When the Iran war sparked a huge spike in oil prices, some in the markets looked to the 1970s era of stagflation for lessons about what could come next. But longtime stock market strategist and money manager Richard Bernstein has been looking even further back to the 1960s. He explains that both then and now, loose fiscal policies in the US and deglobalization have primed major economies for high inflation.
Bernstein, who has been in the markets for 45 years and is global head of macro and customized investing at Janus Henderson, sat down with Morningstar to discuss his thesis around why investors should be prepared for a return of the “Guns and Butter” fiscal policy of the 1960s, and what that means for inflation. He explains why, despite high upward pressure on prices, he favors cash but isn’t bearish on stocks, as well as why he finds dividend-yielding stocks more attractive than the Magnificent Seven.
Parallels to the Guns and Butter Period
Leslie Norton: Why is it worth looking at the Guns and Butter period of the 1960s?
Richard Bernstein: In the mid-1960s, the consensus around the Vietnam War buildup and the Great Society spending plans was that it would do nothing to the deficit or inflation. Looking back, that didn’t make sense because you had an immense amount of fiscal stimulus, and you were taking productive capabilities from the economy to build up the defense sector. Hindsight is 20/20, but of course, that was the beginning of the inflationary spiral.
People are very attuned to the energy shocks of the 1970s because gasoline prices are going up. That’s certainly apropos, but there are a lot of parallels to the 1960s.
Norton: What are those parallels?
Bernstein: Ironically, a lot of programs initiated in that butter period are now being reduced. Instead of social spending, you have the One Big Beautiful Bill, which is the sixth-biggest tax cut in history. At the same time, you have a huge acceleration in defense spending. The last budget had USD 800 million in defense spending. They’ve asked for another USD 800 million on top. I’m not trying to argue that this is identical to the 1960s, but it’s something for investors to start thinking about.
What the Fed Is Missing
Norton: Let’s list those inflationary pressures.
Bernstein: One of my themes since 2013 is that we should start thinking about secular inflation because of deglobalization. The reason the United States experienced secular disinflation, which allowed the Federal Reserve to have this 2% inflation target, was not the Fed’s great stewardship or responsible fiscal discipline. Rather, from 1992 onward, modern globalization was expanding. You don’t need a PhD in economics to know that when you expand markets and increase competition, you get downward pressure on prices.
As you start seeing elements of deglobalization, you’re reducing competition and getting upward pressure on prices. The Fed is still using a 2% inflation target, which seems a bit antiquated in this environment. Maybe they should use 3.0% or 3.5%, or if you want to be hyperbolic, 4%.
In the last five years, we’ve seen an incredible increase in secular inflation. Everybody thinks we’re still in the same environment we were in five to 15 years ago. And please don’t construe this as a political statement, but we’re constraining not only goods through deglobalization, but also the supply of labor. So the odds for more wage inflation are picking up as well.
And I don’t think people realize how healthy the US economy is. In the third quarter of 2025, nominal GDP was around 8% for the first time in 15 years, excluding the postpandemic period. We’re going to get stimulus on top of that healthy economy.
Norton: Obviously, the war has big implications for interest rates. What are your forecasts?
Bernstein: It doesn’t just affect the demand side. The National Federation of Independent Businesses, a survey of small companies, shows historic levels of uncertainty. It’s a real concept that prevents planning. You’ve seen that in hiring, where you’re not seeing a lot of firing, but not a lot of hiring either.
Dividend-Yielding Stocks Look Attractive
Norton: What parts of the market look expensive and cheap to you? Let’s take tech.
Bernstein: You didn’t ask me about industrial stocks or non-US stocks. I’m not trying to insult you, but people have become kind of myopic. There are a million different growth stories in the market, and nobody cares. So, we’re not bearish. The problem is that we haven’t been particularly bullish at all, or bearish on the Magnificent Seven. They’re fine companies, but many other companies were growing as fast, if not faster. In the 1999 tech bubble, the average S&P 500 company was growing earnings 30%, and nobody cared. That’s going on again today.
You can actually get comparable growth, with a dividend yield, at a much cheaper valuation. That hasn’t worked out very well over the past couple of years, but it reversed this year, for several reasons.
One, the Fed can’t cut rates as much as people thought. That takes some speculation out of the market. Liquidity is the lifeblood of speculation, and the Fed is the primary source of liquidity.
Two, the uncertainty. When uncertainty rises, people start focusing on fundamentals more. If you can get 15% growth for 15 times earnings or 15% growth for 30 times earnings, you’re going to take the 15 times earnings, right?
Three, inflation has been stubborn. That takes out a speculative portion of the market. Why? Simply put, nobody’s gonna care about cryptocurrencies if they can’t buy bread and gasoline. If you’re a multi-quarter investor, the opportunity set is monstrous right now.
Norton: What’s your opinion of HALO stocks—the heavy assets, low obsolescence trade?
Bernstein: There’s something to that story. As companies get more mature, they tend to pay dividends. Dividend yield is one of the most under-owned elements of the market. Over the last 25 years, the S&P Dividend Aristocrat Index has been neck-and-neck with the Nasdaq. The power of compounding dividends is remarkable. So one of the main themes in our macro equity portfolios is dividends.
Capital intensity is fine as long as you’re still generating cash flow, less good if you’re not; that’s just an old company going out of business. But if you’re generating cash flow and paying dividends, that’s a very underappreciated aspect of the market right now.
Is Private Credit a Problem?
Norton: What’s the impact of the private credit retrenchment on the market?
Bernstein: I 100% get the long-term story for lower-quality credits. More than 30 years ago, I was one of the first people to write about how low-quality equity combined with low-quality debt was a tremendous long-term investment.
But entry points are very important. Everybody suddenly realized they’re not long-term investors. For the last year, we’ve had virtually no corporate credit in our fixed-income portfolios on the macro side. Simply put, credit spreads were puny. There have only been three times in my career when credit spreads were that puny. One was before the Asian and Russian credit crisis in the 1990s, the second was before the global financial crisis, and the third was before 2022’s inflation scare. All three times, credit spreads blew out. We’re a tactical fixed-income portfolio manager. We had no corporate credit. People thought we were insane.
Is this systemic? We look at credit default swap spreads, which are insurance against default. CDS spreads in the technology sector have blown out. What we care about is whether it’s spreading to other sectors, which would argue that it’s systemic and economywide. So far, that’s not happening. Tech CDS spreads remain very wide, but most other sector spreads have actually decreased.
The Case for Cash in a Portfolio
Norton: You argue that cash will outperform, as it did in the previous Guns and Butter period.
Bernstein: In our all-equity portfolio, we have 8% in cash, which we sliced from other parts of the portfolio. Normally, it’s around 2%. The reason cash outperforms in a period of inflation is that people need more return to go buy bread and gasoline. Now, we’re not talking 1970s-type inflation. But maybe there’s an argument to have a little more cash than you normally would.
