After a ripping first half of the year that was somewhat overshadowed by geopolitical uncertainty and the puzzle of sustained record lows in volatility, we asked several influential advisors what their concerns and expectations are for the second half of the year. They had a variety of responses.
Ben Carlson, Director of Institutional Asset Management, Ritholtz Wealth Management; NYC
One of the things we’ve been touching on a lot lately is to remind people that losses in the stock market are kind of a feature and not a bug.
The fact that we haven’t had many in the past 12 months or so isn’t something we should expect to continue. One of the stats we’ve shared with clients and on some of our websites is that, since 1950, the S&P 500 has averaged a loss of roughly 13.5% per year during a calendar year.
So even when the market finishes up, you can expect to see a double-digit drawdown a majority of the time in the markets. So [investors] should not get too complacent.
In terms of the stock market, the low volatility we’ve had isn’t something that’ll stick around forever. Losses and [the end of] low volatility aren’t something you can guess about, but they will happen at some point.
Robert Meyer, Chief Investment Officer, Ibis Capital; San Diego
I’m most concerned about tax reform in the U.S. The market has gone up on the tail wind of expectations that tax reform would relax consumers and help corporations, but I’m not sure we’re going to see tax reform in 2017. The market isn’t pricing in a delay in tax reform, and if we get a delay, can we even get it done at all with midterm elections next year? I’m not so sure. If it doesn’t happen, market risk rises.
Historically speaking, just about every year in the past 30 years, we’ve seen the market pull back some 5% at some point, and we haven’t yet seen that type of action this year. We could see a correction in the coming months, and a pickup in volatility due to the uncertain future of tax reform. That makes me apprehensive about U.S. equities going forward.
We’re going to be pivoting toward international stocks, adding Europe, U.K., Japan and Australia as a relative value play. We’ve owned emerging market equities since late last year due to attractive valuations already. We see some opportunity in the international space, but the reality is, this has been a nice year for equity returns, and there’s nothing that’s truly cheap right now.
Once we get some volatility back, we might see some opportunities pop up for some tactical moves. Otherwise, we tend to think more strategically.
Linda Zhang, Founder, Purview Investments; NYC
A major concern is that the U.S. bull market is stretching a little too long—into the ninth year—a little too fast with lots of built-in anticipation for the new administration’s pro-growth policies. My worry is that more investors might start questioning whether these policy assumptions will mostly remain theoretical.
The bond market has started pricing in the worries about growth with a falling 10-year Treasury rate and a flattening yield curve. The extended bull market with a rich valuation could be vulnerable to major pullbacks as the hope evaporates. In the 90-year history of S&P 500 Index, the last time the index gained nine-consecutive years was the period ending in 1999.
The concern over market pullbacks has a couple of implications for portfolio positions: First, a tilt toward less volatile assets, such as dividend and low-vol products. Second, add portfolio protection by using a natural hedge via safe-haven assets such as Treasuries or precious metals; or by purchasing synthetic protection through derivative strategies at a low cost while volatility is currently at an all-time low.
Since 2010, investors’ minds might have been conditioned by two strong trends: U.S. assets dominating international assets, and the U.S. dollar dominating foreign currencies. However, in 2017, both trends are fast reversing.
It makes sense to add international exposure by using ETFs with no currency hedge. Most developed-market ETFs have hedged and unhedged versions, while emerging ETFs typically have no currency hedge. I would be cautious about certain individual markets that have gone up too much and too fast, and those markets that are commodity-based.
Brian Rorick, Private Wealth Advisor/Partner, Aveo Capital; Greenwood Village, Colorado
Domestically, we believe there are three key factors that will drive markets in the second half of 2017:
- Earnings Growth: We would like to see a follow-through of positive earnings growth into the second half of the year to validate the bull market in equities and current valuations.
- Economic Growth: GDP disappointed in the first quarter, and if it continues to disappoint, we could see this acting as a head wind to both corporate earnings and wage growth, which is desperately needed by the U.S. consumer.
- Federal Reserve: While it may force through one or two more rate hikes, we don’t believe it will get the economic growth necessary to begin reducing its balance sheet, as it recently indicated was a possibility in the second half of 2017. Without meaningful economic growth, further tightening will likely invert the yield curve, and dramatically increase the probability of a recession in the U.S.
Investors should proceed with caution, but remain invested and well diversified. We will look to overweight alternative investment strategies that have low correlations to stocks and bonds, while also demonstrating an ability to protect on the downside.
We will also look to equity and income strategies that have the flexibility to adapt their exposures and minimize downside risk, such as the QuantX Risk Managed Growth ETF (QXGG) and the QuantX Risk Managed Multi-Asset Income ETF (QXMI).
Gary Stringer, President/CIO, Stringer Asset Management; Memphis, Tennessee
Overall, we remain constructive with respect to our global economic outlook for the second half of 2017.
Steady economic growth and divergent central bank policies are at the center of our outlook, though we think investors may have priced in more potential good news than is warranted. As a result, we expect volatility to increase and near-term equity market upside to be muted.
Regarding U.S. equities, we continue to see value in consumer discretionary, health care and information technology sectors, especially semiconductors. Overseas, we like Europe and Japan, though their equity markets look overbought currently and may need a pause or a pullback.
Emerging markets are one area of concern. Our apprehension is focused on the dramatic increase in China’s level of private sector debt at a time when we view emerging market equity valuations as unattractive. Based on price-to-book value relative to history, investors are willing to pay as much for the uncertainty around emerging markets as they are for large U.S. companies, as represented by the S&P 500 Index. We think the risk/reward trade-off for emerging market stocks and bonds has become increasingly unappealing.