The stock market is down, bond yields are up, there is instability in China’s markets. Federal Reserve Chairman Ben Bernanke has indicated the Fed may taper its stimulus efforts later this year. How are financial advisors reacting and what are they advising their clients?
Christopher Cordaro, CIO and wealth advisor at Regent Atlantic in Morristown, N.J., likened the current market to training wheels on a child‘s bike. “When you tell the child the training wheels are coming off, the child becomes nervous. The quantitative easing has been Bernanke’s training wheels on the stock and bond markets. He’s basically saying, that in awhile, I’m taking these training wheels off and everyone is getting nervous about it.”
New or prospective clients that are still in cash are the most difficult to advise right now, explained Cordaro. “They’ve got a real conundrum.” Staying in cash doesn’t work, he said, you need bonds but they need to be short term and they will have a low return.
If prospective clients are in cash, it is probably because they went to cash in ‘08 & ’09, says Cordaro. “So now they wonder if they missed it. I don’t think they missed it because the U.S. market was just about the only market in the world that was at an all-time high. Europe and the emerging markets still have a ways to go to hit their highs again.”
“The stock market will probably bump around for a couple of weeks before it gets its footing and people realize that there are still multiple choices out there for investments,” Cordaro said. “Stocks are still the best risk adjusted return by far. For the bond market, this is the first of many, many difficult years to come.”
Thomas McFarland, founder of The Darrow Company in Concord, Mass., said, “I think it’s a combination of Federal Reserve Chairman Ben Bernanke signaling the Fed is going to taper and the not-good news out of China, as far as their loan level is concerned, that’s got people nervous.” The Fed is the primary reason for the market going up, so Bernanke’s signal of the tapering could have an adverse affect.
“Before this happened, we shortened up our bond durations in anticipation that the rates may back up. So people will have to step into the bond market with real cash to buy bonds once the Fed leaves,” said McFarland. “We are looking for buying opportunities here.”
McFarland feels this market turbulence could last for at least the first part of the summer. McFarland says clients are not calling. “We did a preemptive move here, the day before the markets went down we alerted clients of the fact that it could be a bumpy summer.”