Last year's stock market volatility has taken its toll: Financial advisers are a lot more skittish about equities now than they were at the start of 2011.
Indeed, far fewer financial advisers intend to increase their clients' equity allocation over the next 12 months than were planning to do so a year ago, and many of the buyers will be looking for bargains.
In fact, only 43.6% of those who responded to InvestmentNews' 2012 Investment Outlook survey said they will increase their clients' allocation to U.S. stocks. Almost an equal number — 42.7% — said they will keep the allocation the same as it was in 2011.
That lack of bullishness also is apparent when it comes to international stocks, with just 18.7% responding that they will increase clients' exposure in that asset group.
That sentiment among financial advisers is in stark contrast to last year, when 63.4% said they would advise clients to increase their exposure to equities. Advisers also felt better about international stocks a year ago, with 60.2% responding that they would increase their clients' shares.
The 2011 Investment Outlook survey did not include a specific question about increasing exposure to U.S. stocks.
Many advisers will be bargain hunting in 2012. Fifty-eight percent of those surveyed responded that they expect value investing, which emphasizes equities with a low price-earnings ratio, to yield higher returns than concentrating on growth stocks. In fact, the largest percentage of advisers surveyed — 21.9% — expect large-cap value to be the U.S. stock mutual fund category to yield the highest returns in 2012.
And financial advisers are certainly no fans of their own industry, at least when it comes to how it will perform for shareholders. The most respondents by far — 43.5% — said financial services will be the worst-performing stock sector in 2012. In contrast, science and technology gained the most votes — 26.7% — for best-performing stock sector.
Despite their lack of enthusiasm for stocks, the majority of advisers surveyed seem to be surprisingly optimistic about the market as a whole. Thirty-seven percent said they expect that the S&P 500 will finish 2012 in the range of 1,300 to 1,399, while 18.1% said the index will end the year between 1,400 and 1,499.
The S&P 500 finished 2011 at 1,257.60, virtually unchanged from where it started the year.
And on a somewhat positive note for stocks, the largest group of advisers responding to the survey, 40.2%, expect U.S. equities to be among the best-performing stock and bond asset classes; 29.9% predicted that emerging-markets stocks will also be among the top performers.
Such mixed feelings by financial advisers for the stock market, at home and abroad, were to be anticipated after a year that saw incredible market swings, political brinksmanship in Washington and an unresolved debt crisis in Europe, investment managers said.
“I'm not really surprised, because I think advisers are susceptible to being influenced by the current headlines, which recently are not very encouraging,” said David Joy, chief market strategist for Ameriprise Financial Inc. “It also reflects the general cautiousness of their clientele. And they're pretty cautious right now, probably with good reason.”
He contrasted the beginning of 2012 with the start of 2011, when the general consensus was that the U.S. economy would “pick up steam and grow at 3% to 3.5%.”
“That all stopped with the earthquake and tsunami in Japan,” he said. “It was a long and very trying year for investors.”
And investors' nerves will likely continue to fray this year, said one adviser.
“I think we're looking at a grand state of malaise,” said Rob Isbitts, chief investment strategist for Sungarden Investment Research, an affiliate of RIA Dynamic Wealth Advisors, which has $195 million in assets under management. “There are many crosscurrents and a lot of reasons to be bearish on the surface. But the fact is, the market hasn't fallen apart, even with the strains of Europe and the U.S. debt problem. It seems like the market has a case of "what doesn't kill me makes me stronger.'”
He said that he expects the U.S. stock market “to fall and fall hard in 2012,” even though he believes it is edging closer to a cyclical bull market.
“This will be a long-term trend,” Mr. Isbitts said. “The next five years will see trading at the top and bottom of the range,” with swings in either direction of 20%, 30% and 40% becoming routine.
“The key word is sustainability,” Mr. Isbitts said. “We might get a 30% move up in 2012, but we could see a 20% decline, too. I expect the wide swings to continue, and that's the kind of thing that doesn't sustain bullishness.”
Despite worries over the stock market, investment advisers are hopeful about the U.S. economy, with 54.4% saying it will slightly improve this year and another 9% saying it will significantly improve. That compares with 26.4% who think the economy is going to stall, with no growth, and 10.2% who believe that a recession is inevitable.
And financial advisers remain leery of increasing their clients' U.S. fixed income allocation, with just 14.9% responding that they would increase clients' allocation to that asset class. That's the second consecutive year for such prevailing negative sentiment for U.S. fixed income; last year, 18.8% of advisers said they would increase clients' allocation in that area.
Adding to the negative outlook for U.S. bonds, the largest number of advisers, 27.1%, responded that it would be the worst performing asset class in 2012.
“Fixed income is, for us, a defensive mechanism,” said Kevin Lilly, president of Avalon Wealth Management, which manages $3.6 billion.
At the moment, the duration of the firm's fixed-income holdings is relatively short, at a little more than three years, he said.
“We're not being rewarded by going out on the yield curve,” Mr. Lilly said. “We recognize that fixed income is not a very attractive asset class right now, but it's still an important one. It's almost one you have to endure in this environment.”
“We all believe interest rates will go up at some time, and we want to be on the short end of the curve when it does,” Mr. Lilly said. “We don't dislike the asset class, but we recognize it's a limited-return investment.”
The InvestmentNews 2012 Outlook survey was based on responses from 539 investment professionals, including registered investment advisers, stockbrokers, financial planners, insurance agents and certified public accountants. It was conducted from Nov. 30 to Dec. 15.