With the stock market officially entering bear market territory this week and runaway inflation forcing the Federal Reserve to undertake an aggressive tightening strategy, a recession appears inevitable and financial advisers are working overtime to prevent clients from panicking.
“Certainly, some clients are getting nervous, but the vast majority are not,” said Byrke Sestok, president of Rightirement Wealth Partners.
Like most advisers, Sestok expects the ongoing coaching and preparation of clients will help keep them focused on the long-term strategy.
“Financial planning charts a path from port to port,” he said. “Sometimes stormy seas will push you off course from your future financial goals and a solid plan helps you get back on course quicker.”
These days, those stormy seas are taking the form of a 22% drop by the S&P 500 Index since the start of the year, crude oil prices that are hovering around $123 a barrel, the 10-year Treasury yield spiking to 3.4%, and inflation at a 40-year high of 8.6%.
Against that backdrop, even the best-laid plans are going to be tested.
“The best way right now is to try to make sure that you can get through it without having to sell into it,” said David Mendels, director of planning at Creative Financial Concepts.
“That means having cash reserves or short-term bonds and CDs that will cover your cash requirements as you ride out the coming recession and since there is always a coming recession, unless we’re currently in one, that means doing nothing different if you have those reserves and if not, then the sooner you adopt that posture the better,” he said.
Dennis Nolte, vice president at Seacoast Investment Services, also believes that clients who prepared for a rainy day will want to pull out the umbrella.
“This has been such a difficult time in the markets, since diversification hasn’t worked much and there’s been nowhere to hide,” he said. “Now that the yield curve has inverted, we think this is just further confirmation that not only the U.S. but Europe go into negative growth.”
Nolte said the immediate reality is that “cash is king right now, but down the road when rates finally moderate, stuff like utilities, health care, consumer staples and bonds will be a good place to invest in for that recessionary period.”
“Clients are beginning to indicate less patience with a declining portfolio, and it’s only been seven months,” he added. “More pain ahead.”
Even with the likelihood of more pain ahead for the financial markets, there's always power in perspectives, said Chuck Failla, principal at Sovereign Financial Group.
“We do not have any meaningful loss in any of our clients’ portfolios that are needed within the next one or two years,” he said, referring to an investment strategy that divides client assets into four buckets that pair risk with time.
“We are hyper diligent to make sure we understand our clients’ cash flow needs,” Failla said. “We still work under the belief that over a 10- or 15-year period, a balanced and regularly rebalanced portfolio will be OK. It always feels horrible right now, but it also felt horrible in March 2009, when the market was down 30%, and it felt horrible in October 1987, when the market went down 20% in a day.”
Thomas Balcom, founder of 1650 Wealth Management, said he has been preparing clients by putting bear markets and economic cycles in context.
“We will be sending our clients a market update later today to reassure them that we're monitoring their portfolios and the markets,” he said. “In addition, we continue to pound the table in support of utilizing buffered ETFs and market-linked notes to provide a degree of downside protection. This helps to prevent clients from making any emotional decisions during these volatile times.”
Balcom said that while some of his clients are getting nervous, “we have yet to receive any ‘Get me out’ calls.”
Bradley Lineberger, president of Seaside Wealth Management, is also talking to clients about history as a way “to take the edge off the fear.”
“This is the 16th bear market since World War II, and it’s the 18th if you count 2011 and 2018,” he said. “On average, stocks go down about 30% and the bear market lasts about a year. The hardest part is trying to time one of these.”
Thirty four percent of advisors surveyed by InvestmentNews say they use direct indexing strategies but 39 percent don’t.
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