Bull Market Has at Least a Year More to Run, BNY Mellon CIO Says

  • Firm is overweight U.S. small caps, underweight European debt
  • BNY Mellon Wealth Management has $238 billion in assets

The U.S. bull market has another year or more to run, with small-cap stocks offering the best potential returns, according to Leo Grohowski, chief investment officer at BNY Mellon Wealth Management.

“For the next 12-to-18 months, we’re still constructive,” Grohowski, who oversees $238 billion in assets, said Wednesday in an interview in Toronto. “It’s still what I’d call an equity-friendly investing backdrop. That said, absolute returns are going to be more challenged.”

Grohowski’s year-end target for the S&P 500 Index is 2,850, less than 100 points above current levels. He sees much better potential in smaller companies that do business mostly in the U.S. and are therefore less exposed to the geopolitical and trade risks pressuring others that rely more heavily on overseas markets.

Small-cap U.S. stocks are “probably our most significant overweight at the moment, and this year that’s paying off,” he said. The Russell 2000 Index has gained 14 percent from its Feb. 8 low, double the gain in the S&P 500 Index during the same period.

The market’s ability to shrug off trade headlines is reasonable as long as corporate earnings stay strong and interest rates don’t get too high, Grohowski said. “We’re not close to making any adjustments in our asset allocation, ie. becoming more defensive, as a result of trade and tariff tension,” he said.

Canadian investors can’t be as sanguine. Although Grohowski only gives the U.S. a 10 percent chance of withdrawing from North American Free Trade Agreement, he said the uncertainty created by ongoing negotiations is bad for business.

“The contagion effect of this uncertainty could be a more cautious approach to capital spending and business investment, and that is the last thing that Canada needs right now,” Grohowski said. BNY Mellon has been recommending an underweight position on Canadian stocks and is now moving “closer to neutral” because of their relatively cheap valuations.

The biggest risk to investors is European yields, which are “distorted” and could jump higher if the European Central Bank ends its bond-buying program and inflation begins to rise, he said. BNY Mellon is “very underweight” fixed income.

Grohowski also expects that volatility is here to stay, even as the bull market keeps chugging along.

“I think the mid-term elections in the U.S. are going to bring another bout of volatility, he said. “That’s one cloud. The other cloud is trade and tariffs, and the third cloud is debt and deficits. Together, those clouds may keep a lid on things.”

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