Mood brightens but suspicions remain

In stark contrast to the fear that swept through the financial markets a year ago, investment advisers are looking at 2010 with expectations for relative calm — though it could be the calm before the storm.

An InvestmentNews survey of nearly 1,300 advisers showed that 62% of respondents are more optimistic about the economy going into 2010 than they were going into 2009.

“I don’t think we’re out of the woods yet, but at this time last year, you weren’t sure we wouldn’t have a complete financial meltdown,” said Ann Fryberger, owner of Fryberger Capital Management.

The mood is certainly more upbeat, but a lot of advisers see storm clouds developing as Congress and the Obama administration try to hammer out a package of financial reforms and struggle to get the economy back on track.

A large majority (75%) of survey respondents don’t believe the government’s efforts to reform regulation in the financial services industry will show positive results.

“Right now we have a government in place that sees business as evil, and all of the policies are toward reducing the effectiveness of business,” said Clinton Struthers, owner of Struthers Financial Services, which has $100 million in assets. “The challenge will be balancing a government that doesn’t want business to be successful, but wants business to pay for all the things it creates to take the place of business.”

Even those advisers who are less pessimistic than Mr. Struthers concur that regulatory reform can be unsettling.

“It’s always a concern anytime government wants to do something, and I never like the idea of more regulators breathing down my back,” said Jim Elder, owner of Elderado Financial Inc., which oversees $43 million in assets. “But I recognize that some reform is necessary.”

“I think we need more enforcement in the problem areas,” he added. “And I think all financial advisers need to be held to a fiduciary standard.”

While 2009 saw the S&P 500 gain about 20%, after losing nearly 38% in 2008, the general sense among the advisers who responded to the survey is that there is still much work to be done, and that the economy presents a minefield of potential problems.

Nearly 58% of respondents said they expect no major stock market correction in 2010, but that doesn’t suggest they expect uninterrupted gains, according to Sam Jones, president of All Season Financial Advisors Inc., which has $120 million in assets.

“Bumpy turbulence,” is how he summed up his outlook for the stock market in the year ahead.

The “oversold and over-bought pattern” will bump up against reality when 2010 second-quarter earnings are compared with 2009 data, Mr. Jones said.

“I think you’ll see some stock market strength continuing into the first quarter, peaking by June, and that will give way to the first real correction of about 15% or 20%,” he said. “That will scare people out of the market.”

Mr. Jones believes the S&P will peak by summer at around 1,300, at which point he plans to take some profits.

“There will be a ton of resistance at those levels,” he said. “There are too many people still on the sidelines for the market to die right here, but at around 1,300, people will start to feel whole again and will want to get back out.”

The trigger-happy-investor theory also makes sense to Gary Flam, managing director with Bel Air Investment Advisors LLC, which has $5 billion in assets.

“Any scares we get now will remind investors of what happened in 2008, and I think we’ll see some pretty volatile markets in 2010,” he said.

According to the survey results, 34% of respondents expect the S&P to finish the year between 1,201 and 1,300, 33% expect it to be between 1,101 and 1,200, and 10% see the market finishing above 1,300.

On the bearish end of the spectrum, 22% of respondents expect the S&P to finish 2010 below 1,100.

“I think the stock market has discounted an awful lot of good news, and I see performance in 2010 as neutral, but it will take some additional good news to get there,” said Tom Pemberton of Pemberton Financial Planning, which charges its clients an hourly fee.

Mr. Pemberton, who kept his clients fully invested over the past two years, has been getting more conservative lately.

“I’ve been putting money in bank CDs,” he said. “I think the stock market is getting ahead of itself and it might be time to take some risk off the table.”

Among the advisers still seeing upside in the equity markets, technology surfaced as the preferred sector, with 27% of respondents identifying it as the category expected to improve the most in 2010.

After technology, 20% of advisers chose energy, and 19% chose financials as the hottest sector in the year ahead.

Still smarting from the carnage of late 2008 and early 2009, a lot of advisers are less focused on hot sectors than they are on safety.

“My responsibility is having my clients in the right portfolio before the problems hit, and I’m not taking any more risk than necessary to meet their goals,” said Bob Holland Jr., a financial planner with First Financial Strategies LLC, which has $150 million in assets under advisement.

Advisers were nearly split on the question of whether they would increase allocations to equities in 2010, but only 37% said they plan to increase allocations to fixed income.

Short-term interest rates, which are now near zero, will likely rise in 2010, according to 54% of respondents, while 46% said the rates will remain unchanged.

“In order to support the dollar and head off inflation problems, the Fed will be forced to raise interest rates,” said Mr. Pemberton. “I see rates going to at least 1%.”

The outlook for the battered housing market is not good, according to survey respondents: 57% said home prices will not budge in 2010, while 15% expect home prices to continue falling, and 28% expect prices to rise.

“Housing prices will continue to fall and prices will stay down until we start to see some inflation,” said Ms. Fryberger, whose firm oversees $17 million in assets. “I told my clients a year ago that the world has changed, and right now we’re in the fear mode because the lack of confidence and trust is the biggest issue.”

E-mail Jeff Benjamin at [email protected].