The fiscal cliff isn't giving money managers nearly as much reason to worry as the uncertainty surrounding it is.
As Congress prepares for another summer of squabbling over debt ceilings, spending cuts and tax hikes, money managers are preparing for another bout of volatility brought on by the lack of visibility.
"WORSE THAN KNOWING'
“Uncertainty is worse than knowing,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management.
Even in the worse-case scenario, which could send the United States back into a recession, knowing the ground rules at least would give businesses, portfolio managers and financial advisers something to plan around, he said.
The most uncertainty surrounds dividends, which have been increasingly popular, given the record low yields in fixed income, Mr. Grohowski said.
Right now, the dividend tax rate is at 15%, but depending on what Congress decides, it could go as high as 43% for that bracket.
“That's a pretty big spread of uncertainty,” Mr. Grohowski said.
With nothing set in stone, markets are likely to be swayed by the headlines rather than fundamentals.
“It's going to be the week-to-week flow of news that's going to drive markets in the short term,” Mr. Grohowski said.
The market's swings are likely to be short-term, as well.
“The market's poised for rallies, but you'd be crazy to play them aggressively at this point,” said Liz Ann Sonders, chief in-vestment strategist at Charles Schwab & Co. Inc. “We're in kind of a dead zone for the near term.”
The fear is causing businesses — and, in turn, portfolio managers — to go into a defensive mode.
“It is probably having the biggest impact on business psychology right now,” Ms. Sonders said of the uncertainty.
“We're seeing that the business is there, but business leaders are hesitant,” she said. “That's been one of the main reasons for the slowdown in hiring.”
Portfolio managers have been mimicking business leaders and hoarding cash, as well.
In June, a Bank of America Merrill Lynch survey of 260 portfolio managers with $689 billion of assets under management found that the average cash balance was 5.3%, the highest since January 2009.
Some portfolio managers are gearing up for what they think will be a series of opportunities brought on by the volatility.
"DRY POWDER'
“One of the things I learned from 2008 and last summer is that it's good to have a lot of dry powder on hand if you think you're entering a period of volatility,” said Matt Fruhan, portfolio manager of the $894.2 million Fidelity Large Cap Stock Fund (FLCSX). “Use periods of uncertainty to add to names you like and think are attractive long-term stories.”
Mr. Fruhan still feels comfortable thinking long-term, despite the short-term volatility, because in his view, the fundamentals haven't really changed since 2008.
“The long-term issues haven't really changed,” he said. “The world is still going through a deleveraging process.”
jkephart@investmentnews.com Twitter: @jasonkephart
