The roller-coaster ride of 2018 has financial advisers bracing for uncertainty in the year ahead. Whether talking about the economy, the financial markets, Fed policy or asset allocation, the financial advisory space appears to be hunkering down for a year full of caution and some new potential challenges.
"In 2019, I think we'll see more of the same from the last six months of the economy," said Matt Harris, head of investment strategy at HighTower Advisors.
Lots of worries
"One factor is the uncertainty, because there are a lot of different things people will be worried about," he said. "And there are a lot of issues from the Trump administration that will increase strain on the markets."
(More: Bob Doll's 2019 predictions)
A year-end survey of 371 InvestmentNews readers ranked uncertainty over the U.S. political system as the biggest issue facing the financial advice industry in 2019. Out of eight issues, 28% of respondents selected uncertainty over the U.S. political system as their top concern.
The second-biggest issue facing the industry, and perhaps related to the first, is regulatory overload, selected by 21% of survey respondents.
In a different question, when asked to rank their level of concern on various topics from "not concerned" to "extremely concerned," more than 50% of advisers said they are either "very concerned" or "extremely concerned" about the U.S. political climate.
The next-closest category, in terms of extreme concern, was geopolitical shocks, which showed 37% of respondents either very or extremely concerned.
"There are some big decisions that have to be made early [this year] ... related to things like Brexit and trade between the U.S. and China," said Scott Kubie, chief investment officer at Carson Group.
"Lots of big news will likely happen at the beginning of the year," he said.
The looming geopolitical uncertainty is a likely force behind the outlook among advisers for a slower U.S. economy in the year ahead.
More than 38% of survey respondents said they expect the U.S. economy to decline slightly in 2019, relative to 2018.
Meanwhile, 23% of respondents said they expect the economy to remain on par with 2018, and 27% expect it to improve slightly.
"I would say that 2019 is not going to be like 2018; it's probably going to be worse," said Kashif Ahmed, president of American Private Wealth.
"We're picking a fight with China, which I think is foolish because they are one of our biggest trading partners, and we are a consumer spending economy," he added. "Playing chicken ... with China doesn't make sense because they can wait it out. There are no swing states that the emperor of China has to worry about in 2020."
The domestic picture is equally messy, according to Mr. Ahmed.
"The Democrats have made gains, and they are sharpening their knives. So it's going to get uglier in Washington, and Trump has really gotten a lot of people spooked," he said. "Investors should expect 2019 to be more volatile because a lot of what people have feared will come home to roost."
Part of the economic-growth challenge in 2019 is the comparison to a relatively robust 2018, which included second-quarter GDP growth of 4.2%, followed by 3.5% in the third quarter.
You have to go back to the third quarter of 2014 to find stronger economic growth.
"The rate of economic growth will slow as a reflection of coming up against difficult comparisons of strong growth this year, but I don't think it's detrimental," said Crit Thomas, global market strategist at Touchstone Investments.
Mr. Thomas is cognizant of the challenges facing the economy, including a possible trade war with China, but he believes both the economy and the financial markets still have some gas in the tank.
"The stock market is already starting to discount a recession in 2020, and we don't think that's a foregone conclusion," said Crit Thomas, global market strategist at Touchstone Investments. "As I look at different signals for recessions, I don't see them out there. Typically, the economy doesn't fall into recession because it's tired; it happens because you build up excesses, and we're just not doing that."
Asked whether they expect the U.S. economy to enter a recession within the next three years, nearly 68% of survey respondents said "yes."
Of those, 28% expect a recession in the second half of 2019, while 44% expect a recession during the first three-quarters of 2020 leading up to the next election.
"At year-end meetings with clients, I've been expressing concerns about what I'm seeing, and I'm setting the bar kind of low because we're overdue for a market correction," said Steve Zakelj, president of Flatirons Wealth Management.
But while Mr. Zakelj is not ruling out the possibility of a "crisis of confidence in the government," he believes the economy is in relatively solid shape.
"If we get a stock market correction of 20% or 30%, I would be looking to buy," he said. "I'm telling my clients to be ready to make large purchases."
Even with the increased market volatility in the fourth quarter, Mr. Zakelj said "the tree hasn't gotten shaken enough yet to force any big changes."
"Seeing accounts that are flat or down a half of a percent for the year is not going to spook anyone," he said. "We're invested now, but I'm telling clients we'll probably raise cash in the next month or two, and we will look to get reinvested when the opportunity presents itself. I'm telling them to get their shopping list ready."
From an asset allocation perspective, U.S. equities will take the biggest hit in 2019, according to 34% of survey respondents who said they plan to decrease exposure to domestic stocks. Only 11% said they plan to increase exposure to U.S. stocks.
|U.S. fixed income||13.5%||52.0%||34.5%|
|International fixed income||14.4%||68.0%||17.6%|
|Liquid alternative funds||6.0%||60.2%||33.8%|
|Private equity/private debt||18.8%||61.2%||20.0%|
International equities will take the next-biggest hit in terms of allocation, with 25% of respondents saying they will decrease client exposure.
Advisers said they will also trim allocations to commodities and private-equity investments by 17% and 19%, respectively.
Cash is king
The allocation winner in 2019 is cash, with 45% of advisers saying they plan to increase cash allocations.
Along the lines of the more cautious mindset, 35% of advisers said they will increase their exposure to U.S. fixed income, and 34% said they will increase exposure to liquid alternative funds.
David Hone, president of LCV Advisors, is expecting a modest 5% return from the broad equity market in 2019, and he is positioning client portfolios to be "sturdy and defensive."
"In 2019, my focus will be on certainty, which means investing in those companies that pay a dividend no matter what and can grow that dividend," he said. "It's more conservative because I'm not relying on high valuations like technology and don't want to worry about high valuations holding up if inflation picks up."