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Wall Street just wasted six months grinding its gears. We’ve seen seasons like this before. Where do the markets and the wealth management industry go from here?
The year started with everything advisors needed to thrive. Tax reform created both the framework for keeping asset prices moving up and a call to action for wealthy investors looking for strategic insight. It looked like the rising tide would lift all the boats.
What we got instead was six months of defensive second-guessing about whether the combination of tariff talk and the yield curve points to a recession on the way.
Everyone’s half a year older — clients, prospects and advisors alike. But with the market locked in the longest correction in a decade, all we really have to show for 2018 so far is time spent.
Those of us who are still working are now a half year closer to retirement. Those of us who aren’t are effectively a half year poorer.
That’s not necessarily a problem, but it’s been a strain. Let’s regroup and see where we’re going and how we got here.
- The Dow still has what it takes to hit 30,000 by year end. The fundamentals remain stronger than they’ve been in ages. Basic valuation math says blue-chip U.S. stocks are now generating enough cash to trade substantially above current levels, even if trade walls erase most or even all of the benefit of tax relief. These companies didn’t need a lot of stimulus to keep climbing across years of ambient growth so subdued it looked like stagnation. A 25% rebound from today’s near-correction territory isn’t all that aggressive. Once the market gets back to work, we’re there.
- Bonds fall off the wall of worry. Suddenly everyone’s an expert on the yield curve. I’m not, but I know that with the Fed actively tightening on the near end you’re setting yourself up for a flat world if you think 3% on the 10-year bond is the end of the world. The market has survived much higher yields and kept rallying for years. We’ve even tolerated a curve this narrowly stacked for years before inversion signals recession. But the only way to cut through the fear is to prove there’s nothing inherently unsurvivable about 3% yields. Once we do that, the future opens up.
- Exotic and unsustainable instruments proliferate. In the meantime, six dead months make people a little anxious. Those who need to recover lost cash flow will chase higher risk in order to get a higher advertised return profile. And even when the regulators are paying attention, it takes years for those kinds of investment products to raise red flags. Get ready to push back on clients looking for an “alternative” that’s too good to be true. If it’s really a good deal, your research makes you a hero. Otherwise, as perverse as it sounds, bank products almost pay real money now.
- The banks are all right. Every correction in the last few years carried the shadow of a relapse to full-blown credit market crash and Deutsche Bank was always at the center of the cloud. Even if Deutsche finally dies this year, it won’t leave a crippling or instantaneous Lehman Brothers style crater. With a market cap now only a little bigger than Comerica or First Republic, this institution is no longer a sprawling global player. And the Germans will do all they can to shore it up. Everyone else passed their stress tests.
- But there’s still too many brokerage and asset management firms. While scale is no longer a good strategy, it’s the only one a lot of people are pursuing. You don't need a hundred little funds that track the S&P 500, more or less. You need either an industry rich in differentiated approaches or heavy at the top -- and this applies throughout all channels and market segments. We'll see consolidation while credit terms to fund big deals are still relatively loose. The Time Warner acquisition proved that vertical mergers are still OK with the regulators, and unless Glass-Steagall emerges from the grave look for “too big to fail” to get even bigger while everyone else looks for ways to achieve that status.
- Robots eat all the organic growth. Automated investment apps capture the ground-level asset pools that conventional advisors haven’t been able or willing to exploit. On the surface, that’s all right. We never wanted these accounts anyway. But unless smart advisors start peeling the higher-net-worth robo “clients” away from these platforms, the industry food chain effectively ends. What do you offer the more sophisticated robo investor? How do you communicate the value your fee structure buys? These aren’t rhetorical questions. Let the robots groom these previously unreachable households into something like viable prospects while your competitors play a zero-sum game of mutually assured destruction.
- The Millennials step up. Sooner or later you’ve got to make the generational pivot and welcome the biggest U.S. demographic cohort ever (bigger than the Boomers) into the economic mainstream. Some of these “kids” with their “phones” and “gadgets” are in their 30s now and have kids of their own. They have conventional jobs, career profiles and planning concerns. The world they inherit from their aging parents is the future. Do you want to be there? This may be the last year anyone can defer an answer to that question.
- Generational wealth transfer is real. If you’re in this business for the long haul, you need to be prepared to provide value decades down the road in one form or another. Obviously you may not be here but the institutions and successors you leave behind will still be communicating your legacy to the multi-generational clients of the future. And if you aren’t here for the long haul, it’s past time to decide what you want to leave behind and how you want to spend the remaining years of your career. After all, conventional clients have started passing on. The world is changing.
- Perpetual gridlock in Washington. Nothing’s going to get done via conventional channels until the midterm elections. There’s a real chance nothing will get done after that. The political discourse has gotten so poisoned that a lot of smart people have opted out entirely, focusing like a good investor on factors they can control and not worrying about the things they can’t. When and if a trade war or any other disruption emerges, we’ll be able to discount the impacts, make any required course changes and move ahead. Until then, it’s all noise. Stay flexible but chasing rhetoric is a sure way to end up nowhere.