The nation’s financial advisors are busier than ever as they try to keep clients calm amid the market turmoil. The COVID-19 pandemic has roiled financial markets sending the S&P 500 down 26% from its high while the Dow Jones Industrial Average has dropped 28% from its peak. Most advisors say they are in constant communication with clients, and many of them are looking to their firms’ investment offices for guidance.
Here’s what the chief investment officers at Morgan Stanley, UBS, Wells Fargo and Bank of America Merrill Lynch, who help oversee some $7 trillion in assets for millions of high net worth customers, are advising right now.
Lisa Shalett, CIO, Wealth Management, Morgan Stanley:
"Head fake rallies” and the sober reality of lower returns.
Lisa Shalett was already cautious about the market in the fall of 2019. Shalett, the chief investment officer for wealth management at Morgan Stanley, says her firm believed the S&P 500 was “frothy” in October when it first hit 3000 points. The index would continue to rise to a high of over 3380 on Feb.19 before plummeting to lower than 2250 points in just over a month. Shalett says the top end figure was facilitated by the Federal Reserve providing liquidity and “fragile, driven by people chasing the market.”
That skepticism around late cycle gains led the firm to add to its long duration treasury portfolios, beginning as early as last April, according to Shalett, in anticipation of a correction. But even that wouldn’t be enough to face the speed and severity of what was to come once the market realized the impact COVID-19 would have on the economy.
“Obviously, we had no idea about COVID-19. We had no idea about a price war between the Saudis and the Russians, but we had turned cautious,” says Shalett. “If you were chasing this market and you were keeping up, with the freight trains that the S&P 500 and Nasdaq were from last October, you got hit by an oncoming train at 90 miles per hour, there's no way around it.”
Shalett sees investment grade ETFs and real estate investments as the most vulnerable in this environment. She is watching for investment grade spreads to compress, and the CBOE volatility index to retreat from its highs. The firm is also tracking interest rates, oil price stabilization, the U.S. dollar and news headlines. She adds that being in New York, the epicenter of the U.S outbreak, gives her a front row seat to how the mitigation efforts are going. If those indicators reach certain levels, Shalett think the S&P 500 could reach 2700 by the end of the year, with a bullish hope for 3000. Her expectation is that investors will see a lot of head fake rallies throughout 2020, noting that this year was already set for volatility prior to the pandemic as a result of the upcoming election.
Looking ahead to when the virus begins to abate and the markets respond accordingly, Shalett expects to see China come out of 2020 “stronger than ever, from a leadership perspective, from a momentum in their economy perspective and from the perspective of them being a center of economic strength.”
Additionally, Morgan Stanley is encouraging clients to take advantage of the opportunities “as painful as it feels right now”, and consider owning emerging markets and Europe at a cheap rate. Conversely, she predicts some natural constraints on U.S. markets and U.S. bonds. Changes are also going to take shape in portfolio construction, Shalett says, as active management will take a more dominant role.
Shalett says that her firm started buying on Friday, March 13, jumping in admittedly early. However, she says that there are still good reasons to be conservative and is preaching an outlook that spans the next few years versus the next few months as there are still growing pains ahead.
As she and others in the investment department at Morgan continue to calibrate for this new reality, she says that clients have to be informed that U.S. stocks compounding 14% annually and U.S. bonds compounding at roughly 9% per year, as they have in the last 11 years, is a thing of the past. Client should expect returns of 5% per year for stocks and 2% annually for bonds over the next five years.
Chris Hyzy, CIO, Merrill Lynch and Bank of America Private Bank:
In search of the market bottom. Then, a “square root recovery.”
Chris Hyzy, who serves as CIO for Merrill Lynch and Bank of America Private Bank, and his colleagues are tracking five signs to determine a market bottom:
For capital to flow more freely into equities, cued by more rational spreads in fixed income markets
For a return to the normalcy of the inverse relationship between stocks and bonds
For volatility to recede in both up and down markets
For signs the U.S. dollar is topping out and eventually weakening to help non-U.S. markets
For the flow of news, specifically bad news, to slow or for markets to start ignoring the news cycle
“When those components are met, you typically go through a bottoming process,” Hyzy said. “We're not looking to time the markets. We're doing this over time and step by step.”
“What we're looking to do and have been doing is re-balancing portfolios according to the stated objectives, that means lowering duration,” he adds. “In fixed income, it means re-balancing up in equities through the bottoming process. Staying with high quality, meaning U.S. relative to the rest of the world and large cap relative to other market capitalization. It means including companies with balance sheets that are strong, paying good dividends and growing their dividends. It means [looking at] companies that can re-tool their supply chain quicker than others and have pristine balance sheets with high cash on hand and don't need the financing markets as much as others.”
Hyzy says that the advisors and firms that were most well prepared for a correction or downturn, let alone the sharp and sudden turn to a bear market that took place, were those that were willing to leave gains on the table. That boiled down to not being overly concerned with participating in every gain of the past few years on a one-for-one basis but taking a longer term and more macro look at client goals and economic outlooks.
Hyzy added that it comes down to fundamental tenets of investing, including diversification, pointing out that when looking at his data, a well-balanced portfolio was slightly in the red while the equity side of the equation was more than 30% down in the span of just over 20 days. He said that bonds and treasuries were serving as a ballast in portfolios.
Circling back to the importance of not chasing one-for-one gains, he said that when a recovery starts to appear amidst good news on the virus front, advisors and firms need to be cautious about jumping in without some defensive positions in place. He also rejects the notion that there will be a “v-shaped” recovery, expecting more of a “square root,” - a drop to the bottom followed by a move up into a plateau as the economy recovers slowly.
Adam Taback, Deputy CIO, Wells Fargo Private Bank
Artificial Intelligence, healthcare infrastructure and biotech will be among the post-pandemic winners.
The departure from the long-lived bull market will make different investments appealing, including hedge funds, according to Wells Fargo Private Bank deputy CIO Adam Taback. He believes that post-pandemic much of the growth will likely be in health infrastructure, healthcare services, biotech, AI learning, virtual learning, and telecom services. In other words, many of the same areas leading innovation prior to the current disruption.
He is also bullish on e-commerce and delivery services, namely Amazon. He admits Amazon packages arrive at his home regularly during this period of staying at home. Investors will also have to consider what societal changes from the era of social distancing are temporary and which ones will be here to stay. Along those lines, he anticipates cruise lines will never see the customer levels they saw prior and is skeptical that all the canceled gym memberships will be be renewed.
He says a financial advisors’ job has become more about managing emotions as they try to prevent clients from panic selling.
“If you sell out now, you would have caught the downside, but you're not going to catch the rebound and so you have to continue to talk clients out of making decisions out of fear instead of rationality,” he added.
Taback says the firm is wrestling with what exactly the “all clear” will look like; from a peak in cases, to an acceptable minimum of cases to a vaccine which remains more than a year away.
With all the spreadsheets and models available to Wall Street conglomerates, Taback said his biggest recommendation is still simple: be patient.
Looking at the road ahead, Taback says there will not be a quick turn upwards nor sudden end to the downward trajectory. Restaurants will need to rehire staff and count on their vendors to rejuvenate the supply chain which will take time. For this reason he is expecting a ramp-up period.
Solita Marcelli, Deputy CIO, Americas, UBS Global Wealth Management:
Treasurys and cash are the best defense. Educated guesses will guide the way forward.
UBS Global Wealth Management deputy CIO for the Americas Solita Marcelli says that the most important preparation her firm made in portfolio management was ensuring clients had ample liquidity in order to help them resist a sell off or panic, and allow the growth portion of their allocations to go untouched.
Marcelli views the current situation as being comprised of three problems: market function, loss of economic output and a healthcare crisis. The solutions, she says, amount to policy maker response and investor confidence. For the time being the firm is utilizing Treasurys and cash to hedge against losses and may look at investment grade corporate bonds going forward. However, she says that in the current conditions “investment grade” can be fluid with the impact of the virus and shutdowns.
Marcelli say that investment officers and big brokerage firms face an uphill battle and are unable to predict the future but says they are relying on best practices and educated guesses to guide the way forward. “All you can do is take what you know today and do some analysis and assign probabilities,” she says.