Syria turmoil expected, advisers brace for volatility
By Darla Mercado and Jeff Benjamin
Aug 28, 2013 @ 4:07 pm (Updated 4:23 pm) EST
With some near-term market volatility expected as the United States prepares to take military action against Syria, advisers are holding steady and keeping a close eye on client portfolios.
“The markets hate uncertainty and this is inherently uncertain,” said Alexander Young, global equity strategist with S&P Capital IQ.
Stock markets bounced back Wednesday after two consecutive days of declines due to fears of impending U.S. military strikes against Damascus. U.S. officials had said that intelligence indicated that Syria had used chemical weapons against its own people, paving the way for the U.S. and its allies to react.
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The selloff largely can be attributed to volatility in the energy sector, Mr. Young said.
Despite the market’s reaction, advisers said they don’t expect to go to cash or seek safe investment havens at this time. Instead, most advisers are watching and waiting.
“We’re not running to the sidelines,” said Meg Green, founder of Meg Green & Associates Inc. “Any time there’s been a war, it bodes well for the market. Will there be shakeouts? Of course, but it’s not the time to run away.”
Mike Mills, an adviser at an eponymous firm in Southlake, Texas, agrees.
“When there’s uncertainty and volatility, you’re going to get calls,” he said, noting that “two or three” clients have called with questions on how to best adjust their portfolio amid Syria’s conflict. “We tell people to stick to their asset allocation and buy into weakness if you’re feeling optimistic.”
Mr. Young said it is important to keep in mind that even without the mounting turmoil in Syria, the financial markets have been growing increasingly nervous about a list of upcoming tests, including the reduction in quantitative easing and a new budget debate in Washington.
“We were in the midst of a pullback based on Fed tapering in a sluggish recovery,” he said. “There are fundamental concerns that have nothing to do with Syria.”
Jim Russell, a senior equity strategist at U.S. Bank Wealth Management, said he thinks that one of the few certainties at this point is market volatility.
“It’s our take that the Syrian situation is very serious and it has the potential to spill over geographically to other countries, but this is not a one-and-done thing. It is likely to play out over the next several weeks,” he said. “It does have our focus because our clients are concerned, and we’re concerned, and it is happening at the very time when the Fed is looking to start tapering and Washington is looking to debate the budget.”
Throwing a major geopolitical event into the mix, he added, has the potential to derail the Fed’s tapering plans.
“We think the markets are reasonably valued and we don’t think this is a time to get out,” Mr. Russell said. “But the nastier it gets [in Syria], the higher oil prices go, and the higher oil prices go, the more impact that has on the global economy.”
Market valuations aside, most investors are conscious of the fact the S&P 500 has gained 16% from the start of the year, following a 16% gain last year. With that in mind, any kind of buildup to a major geopolitical event is likely to trigger some selling.
“I think when you have a market that has risen to recent highs and folks are already tentative, any news like what is happening in
Late August Quiet
It may be early, advisers aren’t hearing much from clients. Indeed, the recent shake-up in the markets is taking place at a time when many are getting in last-minute summer vacations before Labor Day. Further, there have been plenty of scares to keep investors on their toes, including the bond panic earlier this month.
“It’s a combination of when [the downturn is going on] and people being so burnt from all the noise,” said Douglas K. Flynn, an adviser with Flynn Zito Capital Management.
“Syria will be a good excuse for taking some profits off the table,” said James Ball, principal at Ball Financial Services.
“It’s serious business because it’s hard to know how folks in places like Russia will react, and that is a greater concern,” he added. “But from an investment perspective, I frankly look at these times as opportunities for long-term investors to buy.”
Advisers said they’ll tell investors to hold tight and to keep sight of their own long-term objectives. “What makes Coca-Cola less valuable if we attack Syria?” Ms. Green asked. “The markets don’t frighten me.”
Though she recommends that clients focus on ensuring their portfolios are balanced and diversified, Ms. Green said that now is hardly the time to go running to bonds, which still are smarting from a jump in interest rates.
Alternatives are another idea, particularly preferred securities and master limited partnerships, albeit in small quantities. “We’re looking for alternative places to go where someone can have a different flavor,” Ms. Green said. “We’re embracing energy by using MLPs.” Though these investments can be volatile, they produce tax-advantaged cash flow, and that can assuage the fears of jittery clients.
Emerging markets could also present a plum opportunity, Mr. Mills said. “If they get cheaper because of war, then that’s a good buying opportunity,” he said.
Advisers haven’t yet reached out to clients about Syria, and given all of the headlines right now — the prospect of the Federal Reserve ending its bond buying program and the looming fight in October over the debt ceiling — that might be a good thing.
“If you think of retail investors, they’ve been pretty cautious all year, and they don’t need any new reasons to worry,” said Paul Christopher, chief international strategist at Wells Fargo Advisors. In a research note on Syria, he remained positive on the U.S. economy and the stock market.
“The tough part is keeping people in the market and making sure they don’t feel like their savings are about to be swept up in a series of crises,” Mr. Christopher added.
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