Financial Advisor Roundtable Part II: Addressing the Global Pandemic, Market Conditions, and Key Challenges Facing FAs and their Clients in 2020

Lance Roberts: No, in May 2019, I warned our readers and clients that a recession was coming. To wit: “Every financial crisis, market upheaval, major correction, recession, etc. all came from one thing – an exogenous event that was not forecast or expected. This is why bear markets are always vicious, brutal, devastating, and fast. It is the exogenous event, usually credit-related, which sucks the liquidity out of the market, causing prices to plunge. As prices fall, investors begin to panic sell driving prices lower, which forces more selling in the market until, ultimately, sellers are exhausted.

It is the same every time. While investors insist the markets are currently NOT in a bubble, it would be wise to remember the same belief was held in 1999 and 2007. Throughout history, financial bubbles have only been recognized in hindsight when their existence becomes “apparently obvious” to everyone. Of course, by that point is was far too late to be of any use to investors and the subsequent destruction of invested capital. This time will not be different. Only the catalyst, magnitude, and duration will be.

We also warned our clients we were on a cusp of a bear market on March 10 when we reduced our equity exposure. “The action this year is very reminiscent of previous market topping processes. Tops are hard to identify during the process as “change happens slowly.” The mainstream media, economists, and Wall Street will dismiss pickup in volatility as simply a corrective process. But when the topping process completes, it will seem as if the change occurred “all at once.” The same media which told you “not to worry,” will now tell you, “no one could have seen it coming.” The market may be telling you something important if you only listen.

Gregory Wendt: The markets at the end of 2019 were already showing signs of potential volatility – yet since the Q1 2020 was an externally driven set of factors, I can’t say I found it surprising yet the magnitude of the crisis was surprising to say the least.

Dwayne Moyers: The closing of businesses due to the pandemic has really thrown people for a loop. Of course, we have never seen this before, but I think it will actually be particularly good for advisors as people need a little hand holding and probably adjustments to their portfolio for a very uncertain future.

Lance Roberts: No, bear markets have three stages – sharp down, reflexive rebound, and a drawn-out fundamental downtrend.

1. Bear markets often START with a sharp and swift decline.
2. After this decline, there is an oversold bounce that retraces a portion of that decline.
3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

The chart above shows the stages of the last two primary cyclical bear markets versus today (the 2020 scale has been adjusted to match.) As would be expected, the “Phase 1” selloff has been brutal. That selloff sets up a “reflexive bounce.” For many individuals, they will “feel like” they are “safe.” This is how “bear market rallies” lure investors back in just before they are mauled again in “Phase 3.”

Just like in 2000, and 2008, the media/Wall Street will be telling you to just “hold on.” Unfortunately, by the time “Phase 3” was finished, there was no one wanting to “buy” anything. One of the reasons we are fairly certain of a further decline is due to the dual impacts of the “COVID-19” virus, and oil price shock.

Gregory Wendt: Really hard to say – as I feel that anyone attempting to make a prediction at this time may not have considered all in the factors of a range of circumstances and variables, which is still very difficult to do. Our modern portfolio approaches are not necessarily designed to navigate these unprecedented circumstances. It is apparent that the system has dramatically changed and there is no “new normal” or returning to “normal.” We are finding that an entirely different set of tools will be needed to price risk and value in future capital markets. We in the ESG and Impact Investing community have recognized the value of considering a wide range of factors outside of traditional economic and financial analysis – and broadly speaking that has apparently benefitted the ESG funds and performance as generally compared to the markets.

I feel that a lot of people who are currently looking to make meaning of this situation, will not be able to use the same evaluative tools and processes we have used in the past. In addition, the lack of transparency into the future to predict and navigate the kinds of scenarios before us leave me without any real comment on whether this is sustainable or not.

Dwayne Moyers: The equity market rebound is being fed by the fiscal stimulus and has created some particularly good values in certain areas. Whether the market rebound is sustainable is dependent on the consumer and the availability of credit. If the consumer slows spending considerably then I am afraid we are in for a long haul.

Lance Roberts: Given the coming collapse in earnings, and current overvaluations, we have been, since February, and continue to recommend our clients remain heavily weighted in cash and bonds and just wait for the storm to pass. As I discussed recently in our newsletter: “From an optimistic view, a reopening of the economy, a virus vaccine, and an immediate return to low single-digit unemployment rates would greatly expand the bullish ranges for the market. However, even a cursory review of the data suggests a more “realistic” view. The economic damage is going to be with us for a while, and until earnings estimates are revised substantially lower to reflect the “actual economy,” I have to presume the relevant risks outweigh the current reward.

This does not mean we are not long equities. We are, but we are also carrying a much heavier exposure to cash and have reduced exposure to fixed income. We continue to be selective buyers of quality companies opportunistically and will continue to prudently build our portfolios. This is just our approach, and certainly is not for everyone. However, after surviving two previous bear markets, experience has taught us much about “managing risk.”

It is our philosophy to protect our clients. We will continue to follow our process until there is actual visibility into corporate earnings and fundamentals. While it may seem silly, we believe the process of investing is not about “guessing,” but rather “knowing,” what you are buying.

Gregory Wendt: Generally my counsel to clients over the years has been to prepare financial plans and portfolio strategies for the wide range of possible futures and to only commit money to the markets which will be able to ride through volatility for a sustained period of time. That advice has not changed through this crisis and to a great extent our portfolios and client financial plans were generally designed for having money available when needed through a market downturn like we have seen.

Dwayne Moyers: We tell clients to stay invested but adjust investments that can produce returns in a long term sustained weak economic environment. If the economy goes “game back on” they will still do well, but they need to have a worst-case scenario in mind also.

Lance Roberts: Every bear market is different, and the current market volatility may not be over anytime soon. That said, what key takeaways do you have for financial advisors and their clients?

Bear markets are never different, only the catalysts, duration, and percentage decline will vary. However, the results for investors are always the same, a loss of capital larger than they can imagine and it sets retirement plans back for years, if not permanently for most. Buy and hold investing is not the way to manage a client’s life savings. They have financial goals to meet, and as advisors, we have a responsibility to ensure we protect their savings from excessive losses.

As I stated: “Now, the third bear market this century, has likely crushed any ability to achieve that goal. By the time the current recession, and bear market, are over, it will take much longer than anticipated for the economy, and markets, to bounce back. Each recovery has already been slower, and weaker, than the last, and the next recovery will be no different.

With growth rates below 2% on average, wage growth suppressed, and a large contingent of boomers withdrawing assets to sustain their living requirements, the ability to generate higher levels of economic growth will be limited. This will especially be the case as exceedingly large debt levels, and deficits, which were used for non-productive purposes, further inhibits economic prosperity. For those hoping for another bull market to “bail them out,” the outlook isn’t great.

Gregory Wendt: Generally, the best advice I have heard from Richard Branson has been “Prepare for Many Possible Futures” and that applies here.

In the current markets, we have discussed with our clients the same kinds of questions to design a financial plan to and assess their current capacity based on today in order to ensure they can ride through a number of scenarios before us from here, and look at the next 10 to 20 years of life with their current portfolio in mind.

From there these conversations which have led clients to reflect more deeply on their concerns in light of today’s environment and reflect on their needs and futures which have often resulted in strengthened relationships. We are grateful that often times this has provided us an opportunity demonstrate our commitment to our clients our attention to their feelings, needs, and concerns as we move into the unknown together.

Generally, this approach of revisiting a wide range of questions, and focusing on the most important questions in life has increased the courage and resilience for our clients to feel more at ease to navigate through this time through the market turbulence.

Dwayne Moyers: Because of the way the market has unfolded with an unprecedented closing of the economy, buy value with low debt and investments that kick off cash flow whether it is dividends or interest. Do not try to be a hero and make a bet when people will start flying or taking cruises again, we just do not know how people will react.

Lance Roberts, Chief Investment Strategist, RIA Advisors

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common-sense approach, clear explanations and “real world” experience has appealed to audiences for over a decade. Lance is also the Chief Editor of the Real Investment Report, a weekly subscriber-based newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to your money and life. He also writes the Real Investment Daily blog, which is read by thousands nationwide from individuals to professionals, and his opinions are frequently sought after by major media sources. Lance’s investment strategies and knowledge have been featured on CNBC, Fox Business News, Business News Network and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, Bloomberg, The New York Times, The Washington Post all the way to TheStreet.com. His writings and research have also been featured on several of the nation’s biggest financial blog sites such as the Pragmatic Capitalist, Credit Write-downs, The Daily Beast, Zero Hedge and Seeking Alpha.

Gregory Wendt, CFP

Since 1991 George Wendt has enjoyed serving people who desire to align their values, wealth and influence for a better world. His experience includes working at firms, including Smith Barney, UBS, Prudential Securities, and EP Wealth Advisors. As an experienced financial advisor, economist and Certified Financial Planner, he has had the privilege of serving leading groups such as the Milken Institute, Obama Administration, California Forward, and a number of economic policy initiatives. Mr. Wendt currently lead the west coast office of Stakeholders Capital, a boutique registered investment advisory firm specializing in Impact Investing and Sustainable Wealth Management.

Dwayne Moyers, Vice President & Senior Portfolio Manager

Dwayne Moyers began his career as a Financial Advisor with Fort Worth, TX and Weatherford, TX in 1991 with Investment Management and Research which later became Raymond James Financial. He began managing outside clients in 1994. In 1997 he co-founded what is today SMH Capital Advisors, LLC (SMHCA). Mr. Moyers has been Senior Portfolio Manager and the Chief Investment Officer at SMHCA and its predecessors since 1991 with responsibility for research and the investment selection process for the SMH portfolios. He has served as portfolio manager of the for Total Return Income and High-Income Funds since their inception. To this day, over 28 years later, Mr. Moyers still directly advises clients in his practice – having direct knowledge of what advisors face on a day to day basis.