Financial advisers put market volatility in perspective for clients

Absence of Santa Claus rally triggers talk of bear markets and recession

Dec 19, 2018 @ 1:59 pm

By Jeff Benjamin

No, Virginia, there is no Santa Claus rally this year, and that has advisers scrambling to calm clients as the financial markets head toward the worst December in 50 years.

With the U.S. stock market having dropped into correction territory, and now down more than 14% from its September high, it's only logical that financial advisers will start addressing fears related to a bear market or a recession.

"We're being very proactive, and we sent a video our to clients last week," said Gregory Sarian, managing director of The Sarian Group at HighTower.

Like a lot of advisers these days, Mr. Sarian is trying to keep clients focused on any silver linings, such as the ability to buy low, but he is also keeping a realistic perspective that market cycles can be painful.

"We're conveying the message that this is not the beginning of a bear market, but rather a continued bout of volatility," he said.

The already-jittery equity markets reacted negatively to Wednesday's news that the Federal Reserve would be inching interest rates a quarter-point higher, with plans for two more rate hikes in 2019.

The S&P 500 Index, which finished the day down 1.5%, dropped 2.5% from a peak just before the Fed's 2 p.m. announcement.

For financial advisers, there is no escaping the reality of increased market volatility and frayed investor nerves.

"It's unnerving for everyone, which is why we try to get ahead of it," said Daryl Deke, principal and CEO at New Market Wealth Management.

In an effort to keep clients focused on the long-term, Mr. Deke explains that over the past 20 years, through 2017, the S&P 500 has produced an annualized gain of 7.2%, and a portfolio of 60% stocks and 40% bonds had an annualized gain of 6.4% over the same period.

And those annualized gains included periods in 2000 and 2007 when the S&P lost half its value.

"Down markets are not unusual," Mr. Deke said. "These things happen and have happened with some regularity."

Mike Loewengart, chief investment officer at ETrade Capital Management, agreed that investors have been lulled into a false sense of security by a decade-long bull market, and that perspective is what advisers need to present.

"Anyone who has been around the markets should not be surprised by this level of volatility," he said. "It's never fun, but it's a natural part of being invested for the long term."

Mr. Loewengart is not yet ready to rule out a Santa Claus rally, which typically involves a market spike during the final two weeks of the year.

Fuel for a rally could come from the Fed in the form of a less-aggressive rate-hike strategy going into 2019.

"A rate hike is no doubt an endorsement of the strength of the U.S. economy, but rising rates are a concern, and a risk factor for equities," Mr. Loewengart said. "Additionally, there is the tone from what we hear related to the trade front with China, and the status of those negotiations."

As Santa Claus rallies goes, 2018 is a bit of an anomaly.

Are we headed into a bear market?
Are you proactively reaching out to clients to gauge their reactions to the correction?
Are clients reaching out to you to talk about the downturn?
Source: InvestmentNews survey

Over the past 10 years, the last 10 days of the year have produced an average gain by the S&P of 1.7%, including extremes of a 5.5% gain in 2014 and a 71-basis point drop in 2012.

There have only been three negative final 10 days over the past 10 years.

This year, from Dec. 13 through Wednesday's close, the S&P is down 5.4%.

Leon LaBrecque, chief executive at LJPR Financial Advisors, uses such data to illustrate how much the stock market has been oversold.

"There's a lot of speculating about the Fed, trade, and the president, which is why I think this is a temporary oversell, and not a full-blown downturn yet," he said.

Like a lot of advisers, Mr. LaBrecque said he is getting increased calls from clients regarding the markets."

"A slight majority are asking when we will start buying more, and we're not," he said. "The other group asks when we're going to cash, and we're not."

The sentiment is in line with a survey of InvestmentNews readers earlier this week.

The findings show that 64% of respondents are proactively reaching out to clients, mostly via individual phone conversations.

Only about half of the adviser respondents said clients are contacting them about the market volatility, and less than half of advisers think the stock market is heading into a bear market.

But as market cycles are inevitable, it is worth noting that bear markets are typically brief, relative to bull markets.

From 1926 through September of this year, the S&P 500 has experienced eight bear markets and nine bull markets.

Over that time, the average bull market has lasted 9.1 years with an average cumulative total return of 480%.

The bear markets, over the same period, lasted an average of 1.4 years with an average cumulative loss of 41%.

"You have to ignore the temptation to sell everything and run," said Mr. LaBrecque. "It's why discipline is so important."

Nearly 60% of advisers surveyed by InvestmentNews said they are not making changes to client portfolios in response to the market turmoil.

Those who are making portfolio changes, are often looking to take advantage of the lower prices.

"We're not doing any selling; we are actually accelerating buying by taking advantage of the pullbacks to advance January purchases now," said Mr. Sarian of The Sarian Group. "But we do think something bigger and more detrimental is coming, and you could see a true recession sometime in late 2019 or 2020."

Paul Schatz, president of Heritage Capital, is also staying nimble and hoping for the best.

"It's downright putrid right now, with every single little rally being sold," he said. "Sentiment is approaching the negative extreme and a whole host of indicators show positive returns over the next three to six months. However, stocks still need to stabilize right here and now."


What do you think?

View comments

Recommended next

Upcoming event

Dec 05


ESG & Impact Forum

Thought leaders, investment strategists and practitioners will gather at the United Nations Headquarters to translate global ESG and impact investing perspectives into strategies that resonate with investors and produce desired outcomes.... Learn more


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print