The political posturing and ominous headlines heading out of Washington in recent weeks forced a lot of financial advisers into damage control in an effort to prevent clients from overreacting.
As the Dow dipped 4.5% while lawmakers wrestled over the federal budget
-- until Congressional leaders reached an agreement on the debt limit and federal spending late last night -- , some advisers gradually adjusted their clients' portfolios by adding cash and trimming some government bonds.
Many advisers, however, preached patience and were already looking past some kind of resolution -- one that could potentially propel the markets in the second half of the year.
“Worst-case scenario is that the Dow will trade intraday [down 3.5%] at 11,900 in a mini-panic before a deal is struck," said Paul Schatz, president of Heritage Capital LLC, which has $110 million under advisement, in an interview last week. "But then we will head to 13,500 by the end of the year,”
“People [were] reacting based on the headlines, not on what the markets [were] doing,” added Mr. Schatz, a tactical investor who has been buying equities on the market dips.
While the markets have been choppy as the debate in Washington has droned on, Mr. Schatz pointed out that the current market dip represents the fifth time in the past 12 months that the stock market has declined by between 4% and 8%.
The long-term perspective, which most advisers tend to preach, falls along the lines of sitting tight and waiting for the volatility to pass.
“I don't know that any of this has any long-term impact, although in the short term, people do get to freak out for a while,” said Clinton Struthers, owner of Struthers Financial Services, a $100 million advisory firm. “I have to wonder to what extent we've already built all this into the market prices.”
That thinking is echoed by Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management Inc., which has more than $250 million under management and supervision.
“I believe that the market has essentially priced in the belief that an agreement on the current debt ceiling will happen,” he said. “It is now just a question of when the agreement will be finalized, and what the length and terms of the finalized agreement will be, Mr. Mahn said. “These points may ultimately move the market over the short term.”
Mr. Mahn, who has not been adjusting portfolios as a reaction to the debt debate, added: “After this current crisis is behind us, investors will return their focus to a stalling economic recovery that is facing multiple head winds.”
Jeff Sullivan, managing director and partner at HighTower Advisors LLC, a $19 billion advisory firm, has learned that the best way to keep clients calm is to provide plenty of warning that rocky times are ahead.
“Our clients have been primed that we should remain as cautious as possible and I think that has led to fewer panicked calls,” he said.
Like a lot of advisers, Mr. Sullivan has been tracking the broader economic indicators and adopting a more conservative approach to the markets.
His average cash position has been increased from 3% to 10%, and he also is hedging his portfolios with managed futures, precious metals and some long/short equity funds.
“We think there's a 50% chance of a [U.S. debt] downgrade, and the downside of that could be a 10%” stock decline, he said. “But we're equally concerned about the bond markets and a spike in interest rates as a result of the downgrade.”
The economic indicators began to look gloomy last fall to Theodore Feight, president of Creative Financial Design.
“We started to get out in September because of the charts. All of our bond money is out unless it is coming due this year or next,” he said. “Clients are between 10% and 30% in cash, and I've telling them it could be any day now that we get back in.”
When Mr. Feight moves back in, however, he will choose only high-dividend-paying equities.
“We think interest rates are going to go crazy,” he said. “I think we'll be looking at between 5% and 7% on the 10-year Treasury.”
