Stockmarket sell-offs are always tough for financial planners and their relationships with their clients. And this latest sell-off comes at a time when those financial institutions selling alternatives to stocks, such as annuities, are advertising hard that life should not be about worry- ing about the ups and downs of equities markets. So, what do we say to keep our clients focused on their goals and their plans?
George Boubouras, the head of investment strategy at UBS, argues that on a 55-year basis good quality stocks have returned 11 to 12 per cent; and though he suspects that 10 per cent might be the kind of return they will average in the upcoming years, he remains positive on stocks.
Geoff Wilson, the founder of Wilson Asset Management, who has always been a bear and still is, thinks the market will be going sideways to down over the next year or so but expects what he calls a bear market to end in 2013.
“At the end of a bear market there is usually a big bounce,” he told an audience at the Trading and Investing Expo at the Sydney Convention and Exhibition Centre at Darling Harbour on August 6. This was a day after a sell-off of shares of around four per cent on the Australian stockmarket.
That week the S&P/ASX 200 shed 7.6 per cent – and you can blame that on the incompetence of the EU officials to manage the Italian and Spanish bond problems, the expectation that the USA could dive into a double-dip recession, and the consequences of the less than impressive settlement of the deficit reduction and debt ceiling decisions on Capitol Hill in Washington.
So, let’s deal with each issue one at a time to see what a financial planner, who believes in time in the market rather than timing the market, could say to clients.
On the EU screw-ups, the European Central Bank (ECB) quickly learnt its lessons, belatedly reacting to the sell-off by informing the market that it will be buying bonds to support the Italian and Spanish governments.
Before the shares tumbled it was thought that the ECB would deal with financial issues until European politicians were back from their summer vacations. After that the politicians would pass the necessary fiscal responsibility measures. However, the ECB has kept the pressure up on stressed governments to take concrete steps before it will provide bond-buying support.
So the ECB was in charge while the politicians were on holidays but the ECB did not want to do anything until the politicians passed tougher measures to sort out their debt problems. And they could not do this until they, you guessed it, returned from their holidays!
It’s the script for a B-grade foreign film – a farce, of course!
Jan Hatzius, the chief economist at Goldman Sachs, expects the US to grow at a two per cent pace in the second half of 2011. That said, he says if things don’t go to plan, a recession is possible. He expects the Fed to make a contribution to prevent another recession.
On the debt debacle, the S&P down- grade will not help, but its action does not affect short-term debt and the other two ratings agencies are not expected to follow S&P.
My argument is that the wrongs will be righted on the political front and the market’s reaction will ensure that positive steps follow. I would then argue that history says the third year of a US presidency generally produces a positive stockmarket result.
After the big sell-off, the S&P 500 was down by more than four per cent for the year to date. Therefore there is plenty of scope for Wall Street to turn positive over the second half of 2011.
History also says the fourth year of a presidency is good for stocks as an election looms in November.
And on that basis, long-term inves- tors should remain committed to stocks, despite the recent ups and particularly the downs.
