Eaton Vance: Advisors Bracing for Surge in Political and Market Risks
Even with this week’s pre-Thanksgiving holiday doldrums, market volatility has been hovering around historically low levels for most of 2017. But that might not be the case too much longer.
At least that’s what many financial advisors are warning their clients about these days, according to a new survey released Tuesday by Eaton Vance. It finds that market volatility is now at the top of most lists of concerns for 1,000 U.S.-based advisors polled.
In fact, 69% of FAs questioned are now predicting heightened price gyrations in U.S. stocks over the next several months. “This is significant since we haven’t seen this elevated of concern about market volatility for at least six quarters,” says John Moninger, an Eaton Vance managing director.
That came just as the 2016 presidential election was gearing up. “There was a big pickup in fears about markets becoming more volatile heading into the presidential election, then afterwards those concerns about political and economic uncertainty subsided,” Moninger observes.
The bull market, which has been moving forward since early 2009, has lifted domestic prices to at least reaching “fairly” valued status in the eyes of 74% of those polled. “So advisors aren’t seeing stocks as great bargains anymore,” Moninger says.
The survey does find, however, that 62% of FAs are concerned that geopolitical issues or a major “conflict” will spur a volatility spike. “Corporate profits are still strong and stocks are seen as at least fairly valued, so most advisors aren’t bearish yet,” Moninger says. “But with the current political climate, the majority do tell us they’re bracing for an aftershock caused by future geopolitical events.”
On the flip side, 81% of advisors surveyed indicated they’re either neutral or bearish on bonds. “The driver is a belief that the Federal Reserve will raise interest rates at least twice in the next year,” Moninger says.
Jerry Slusiewicz, president of Pacific Financial Planners in Laguna Niguel, Calif., isn’t making any short-term predictions. But the veteran advisor is a student of technical analysis – i.e., reading charts to see where market momentum might collide with longer-term business fundamentals.
As a result, he’s pointing out to his clients that “we’re in a new paradigm.” The advisor, who manages about $90 million, notes that the CBOE Volatility Index – known as the VIX – in the past has rarely slipped below a numerical reading of 10. “But in the past six months the VIX has traded below that level at an unprecedented rate – we’ve seen sub-10 volatility last for weeks at a time,” Slusiewicz says.
That’s ironic given all of the political turbulence taking place around the world, he observes. From Brexit in the U.K. and uncertain coalition-building efforts in Germany, to nuclear threats aimed at the United States from North Korea, Slusiewicz says he’s fielding more questions from his clients about possible ramifications to their portfolios.
“Even with all of this saber-rattling overseas and political dysfunction in Congress,” he adds, “the stock market has remained surprisingly calm.”
Considering this bull market ranks as the second-longest in history, Slusiewicz says “the fear is that we’re basically seeing the calm before the storm.”
In certain sectors and certain stocks, he’s still making a case for generally positive conditions. “But in this historically low volatility environment,” Slusiewicz says, “we’re also letting out clients know that it just makes sense to remain vigilant.”
Nathan Kurita, an advisor with Pinnacle Wealth Advisors in Nashville, Tenn., agrees that higher volatility is likely on the way. “But it’s a little bit of a fool’s errand to try to predict when it’s going to happen,” he says.
So the FA, whose team manages about $250 million, is using current market jitters to re-engage his clients in further dialogue about their long-term investment strategies.
“All along the way we’ve been letting them know that they should expect bouts of volatility,” Kurita says. “That’s allowing us to use these periods of market uncertainty to go back and make sure each client has the right long-term asset allocation and investment plan.”