Advisors' worst fears coming into 2023 proving groundless, so far

Financial advisors are maintaining a generally gloomy outlook on the financial markets this year, but are banking on a rebound of the technology sector to carry the day, according to research from CoreData.

The research, conducted at the end of last year, shows 54% of advisors believe the current economic environment is the worst since the global financial crisis 15 years ago.

At least 40% of advisors expect market volatility to increase this year, and 50% believe the Federal Reserve will continue hiking interest rates beyond 5%, which is about 50 basis points above where rates are currently.

The reality, at least through the first six weeks of the year, hasn’t been as dark as the financial professionals anticipated.

The S&P 500 Index, which fell by 18.2% in 2022, is up 6.8% so far this year. The bond market, represented by the iShares Core US Aggregate Bond ETF (AGG), fell 13% in 2022 for its worst year ever. But the bond category is up 1.1% this year.

And the classic 60/40 portfolio, represented by the Vanguard Wellington Fund (VWELX), which was down 14.3% last year, is up 2.3% since the start of 2023.

Compared to the low bar of last year's market performance, 57% of advisors are expecting stocks to do better this year.

The general skepticism about traditional asset allocation strategies has been driving the appeal of alternative strategies, mostly in an effort to hedge downside risk. But if markets continue to inch forward, it's possible some portfolios will feel the weight of shifting to alternatives too late.

Amid the expected uptick in volatility, 42% of advisors say that they're positioning client portfolios defensively, but that they're facing challenges implementing these strategies, with 45% saying they're struggling to find safe-haven assets.

This is raising questions about the suitability of the 60/40 portfolio, with 27% saying the model no longer works.

“The 60/40 portfolio model had a year to forget in 2022,” said Andrew Inwood, founder and principal of CoreData. “We expect advisors to reevaluate strategies based on this traditional model as they seek more innovative solutions to diversify portfolios ahead of what will likely be another bumpy year.”

Meanwhile, the challenging market backdrop is propelling advisor toward active managers. Nearly four in 10 (38%) say they will increase client allocations to active funds over the next 12 months. A lower portion (27%) plan to raise allocations to passive funds.

When it comes to leaning on technology to carry the day, that strategy has been working so far.

The iShares Exponential Technologies ETF (XT), which lost 27.8% last year, is already up 12.1% this year.