Blaze Portfolio Speaks With RIAs On The State Of The Market Circa 2019

2017 was a monumental year for the financial world that saw a massive surge in equity investments and the passage of a revised tax code intended to spur economic growth and private liquidity.

2018, on the other hand, saw a market plagued by dramatic bouts of uncertainty, even amid a flood of share repurchases and dividend programs issued by companies reaping the outsized benefit of the new tax code.

Now, with 2019 already begun, we at Blaze Portfolio thought it would be enlightening to speak with a collection of Registered Investment Advisors about their perspective on their clients’ most pressing concerns relating to how to handle volatility in equity markets, the real fallout of the 2017 tax shuffle and whether the extended bull market of the past decade is still charging ahead.

On The Rise In Volatility

While market volatility will inevitably create some level of investor anxiety, it is an inevitable part of investing in risk assets. However, as we know well at Blaze, volatility also provides opportunities in terms of timely security purchases and sales, and in taking advantage of tax-advantaged trades. As these RIAs have indicated, an important component is communicating how a firm's investment approach can help achieve the long-term results clients are seeking.

Alec Berens, Director of Research, Sterling Investment Management, Scottsdale, AZ, $300M AUM
"For us, there are two types of client reactions the ups and downs of the market over the past year. One group has fully delegated the investment responsibility to the firm. They trust us to make sensible moves and we don't get a lot of feedback. The second type wants to know why they don't have lighter stock allocations in the kind of down market we had last December, and why they don't have a higher allocation when the market is up, as it was early in 2019. We do make risk adjustment shifts, and fortuitously, had lightened our equity exposure after the third quarter in 2018, especially to the higher flying technology stocks, and layered some of those positions back in January. So over the past year, we have a pretty good response for the second group."

Paul Meehan, Managing Director at Edgemoor Investment Advisors, Bethesda, MD, $960M AUM
"We believe our value orientation provides some risk mitigation. Our clients, particularly our longer-term clients, understand we take the long view and have been through downturns with us, so seem to be more comfortable riding them out."

Tim Medley, President, Medley & Brown RIA, Jackson, MS, $600M AUM
"We really don't get much feedback over asset allocation, even during these markets bumps. I think we do a good job in risk assessment and appropriate allocation and in communicating that we don't believe we have the vision to make short-term market bets."

Eric Rosel, Co-founder, Morgan Rosel Wealth Management, Denver, CO, $200M AUM
“Market action is often the main topic of discussion we have with clients. We have a lot of discretion in our models and we lightened our risk exposure last October and increased it in February so that naturally sparks a lot of discussion.

On The Tax Overhaul

A recent preliminary report published on April 15 in The New York Times showed that about two-thirds of Americans got a tax cut in 2018. That contrasts heavily with polls that indicated only 40 percent of Americans felt they'd received one. As was predicted, the percentage of taxpayers receiving cuts and the amount of those savings rose with income. Our conversations with RIAs reveals the differences were often not dramatic enough to spark much enthusiasm and varied highly in terms of geography and circumstances.

Alec Berens, Director of Research, Sterling Investment Management, Scottsdale, AZ, $300M AUM
"One change is that we're seeing more filings on time and fewer extensions, which might indicate our individual investors are more eager to see the results of the changes. We've had a lot of conversations on how the tax code changes affect investments. Our take is that the changes gave the market a nice boost, but that boost is well behind us now and it makes sense to return to looking at fundamentals."

Walter Dewey and Benjamin Dickey, Principal, Resonant Capital Advisors in Madison, WI, $448M AUM
Dickey: "What we're seeing with them are the consequences of a tax policy that was enacted in a hurry, while regulations and interpretation were slow coming. The benefits were top-loaded while the devil was in the details, which have produced some nasty surprises."

Dewey "Especially if we're talking about a family with property taxes or mortgages on two homes."

Paul Meehan, Managing Director at Edgemoor Investment Advisors, Bethesda, MD, $960M AUM
“One factor could be that the lower tax brackets may have been largely canceled out by the reduction of deduction benefits."

Eric Rosel, Co-founder, Morgan Rosel Wealth Management, Denver, CO, $200M AUM
"In general, most of our clients are showing some surprise that the touted tax cuts aren't making much of a dent in their liabilities. Some of that may be perception, particularly those affected by the reduction in withholding, and a bit of that may be the shifts in capital gains for our clients, since we realized more in 2018 than in some previous years."

On The Bull Market

After a rocky end to 2018 investors may have been steeled for a volatile first quarter. Instead, the market moved steadily upward in a seemingly complacent drift for much of the first four months. But May did not open with the same sort of benign action.

In the wake of expanded tariffs—and perhaps a sense that the overall bull market was getting extended after more than 10 years—the domestic stock market showed its capacity for steep plunges. One of the chief tools of Blaze software is its ability to respond to immediate trading action when an advisor, technical indicators or tax-trading opportunities inspire a broad move. In addition to the trading side of volatility, we were curious to see what clients are saying to their advisors about market action.

Walter Dewey, Benjamin Dickey, Principal, Resonant Capital Advisors in Madison, WI, $448M AUM
"Most of our clients suffered through the financial crisis and then saw ten years of relatively steady market advances. In that context, the drop at the end of 2018 and the action this year just hasn't been significant."

Paul Meehan, Managing Director at Edgemoor Investment Advisors, Bethesda, MD, $960M AUM
"After the strong returns in 2017, we heard a lot of questions about 'how long can this go on?' When we had that double-digit dip towards the end of 2018 we were quick to let our clients know how we felt -- which was that we thought fundamentals were not as bad as the market action seemed to indicate. We felt that there was a good chance it would bounce back fairly quickly, and fortunately, that's what happened in the first quarter of 2019."

Eric Rosel, Co-founder, Morgan Rosel Wealth Management, Denver, CO, $200M AUM
“In general I would say that clients are more nervous about how long this stock market rally can be sustained. That's not a new mood, but I think clients are a lot more aware,  they're paying more attention to risk. The next chapter of concern is definitely the next round of national elections which is just heating up, with its possible impact on tax and other policies and the potential market impact."

Visit BlazePortfolio.com for more insight into how to best rebalance your clients' portfolios for 2019 and beyond.