Market meltdown tests advisers

More than 39% of financial advisers said they had increased their clients’ cash allocation in the past two weeks, according to an InvestmentNews survey taken Friday.

In addition, 40.2% of the 766 advisers who participated in the survey said they thought that the Dow Jones Industrial Average would hit a closing bottom of between 7,500 and 7,999, while 27% said they expected it to hit a bottom below 7,500. Just 4.7% said they thought that that the Dow industrials had already hit their closing low.

The survey also found that advisers were divided about where they thought the index would be at yearend. More than 34% said that they expected it to be at between 9,000 and 9,999, while 20% said between 8,500 and 8,999, and 15.5% predicted between 8,000 and 8,499.

Advisers weighed in at the end of another dreadful week for Wall Street and the markets, as the government’s bailout package failed to restore confidence among investors.

Indeed, the Dow industrials plummeted 1,874.19 points to 8,451.19, marking the biggest weekly drop in its 112-year history. The index plunged 18.2%, exceeding the 13.2% loss experienced during the week of the 1987 market crash and even surpassing the 16.7% drop for the week ended July 22, 1933, in the depths of the Great Depression.

The U.S. wasn’t alone. The MSCI World Index fell 16.07% for the one-week period through last Thursday. It was a week of angst for frazzled advisers, who desperately tried to calm panicked investors flooding them with phone calls.

However, most advisers urged fearful clients not to make hasty sell decisions, reminding them that it is never smart to sell low.

“Clients are noticeably freaked out, and they are getting more scared every day,” said Bob Stone, a founder of advisory firm Telemus Capital Partners in Southfield, Mich., which manages more than $3 billion in assets.

USING HONESTY

“I’m honest with them,” he said. “I tell them it’s the worst I’ve ever seen it in my 20 years in this business, but I also tell them that this too shall pass and that they have to be patient and defensive.”

Mr. Stone boosted his clients’ cash positions to 30%, from 10%, and trimmed their equity exposures to less than 25%.

“We’re all feeling shellshocked. But what we’re seeing right now is panic selling,” said a representative at Wachovia Securities LLC of St. Louis, who asked not to be identified.

“The only solace is that [the violent sell-off] is often an indication that we’re at, or close to, a bottom. We’ve got to help people avoid doing the one thing that intellectually we know is wrong,” said the rep, who is urging clients not to sell.

Some advisers see the market turmoil as an opportunity to pick up blue-chip stocks on the cheap.

“Long-term investors, or those who don’t need to touch their investments for four or five years, should use a small percentage of their portfolio to buy stocks such as American Express Co. (AXP) of New York or San Francisco-based Wells Fargo & Co. (WFC), said Charles Zhang, managing principal of Zhang Financial in Portage, Mich., which manages $800 million in assets.

“When people are selling, it makes for some good buys,” said Steven M. Elwell, a financial planner with Schroeder Braxton & Vogt Inc. in Amherst, N.Y., which manages about $215 million.

Tom Orecchio, principal of Greenbaum and Orecchio Inc. of Old Tappan, N.J., which manages $400 million in assets, isn’t recommending that investors cash out unless there is a desperate need for liquidity. “You need to stay in the market so when it pops up — and it will — you’ll capture the upside,” he said.

WILD RIDE

As the Dow industrials swung wildly on Friday amid heavy volume, President Bush spoke from the White House Rose Garden, urging the markets and the general public not to lose faith.

Dean Baker, co-director of the Center of Economic and Policy Research in Washington, said that the market turmoil clearly reflects the huge sell-off overseas as well as investors’ skepticism toward the bailout package passed by Congress Oct. 3. He said that little has been done to implement the package in the past week — a situation that has fueled uncertainty.

“It’s been somewhat of a disaster that they weren’t prepared to move pretty quickly after they had raised such expectations,” Mr. Baker said.

Although he acknowledged that some steps, such as the auctions to buy troubled loans, take time, he said other steps, such as buying equity positions in financial institutions, could have been taken immediately. The market sell-off reflects “panic selling” by investors, and hedge funds’ dumping stocks to make margin calls, Mr. Baker said.

He thinks that the country is heading for a serious recession, not a depression.

“I think it was incredibly irresponsible for President Bush to raise that specter, because he scared people to death. I never heard of a sitting president saying that his own policies might bring us the Great Depression,” Mr. Baker said.

George Simon, a partner at Foley & Lardner in Chicago, agrees that the country isn’t heading for a depression. “Don’t forget, you had 30% unemployment in the 1930s — and right now, we have 6% unemployment — so the fundamentals are much, much stronger,” he said.

Mr. Simon blames short selling for much of the market’s sell-off, and he said that all short selling should be restricted, at least temporarily.

Advisers voiced mixed views on how soon and how strongly the markets and economy will rebound.

“It seems to me that the inmates are running the asylum in Washington, and I don’t think anyone on Capitol Hill has a clue about what is wrong with the markets and how to fix it,” said Michael D. Noland, principal at The Greenbrier Group LLC in Marietta, Ga., which manages $50 million in assets.

It will likely be 2018 before investors see their stock index mutual funds once again hit new highs, predicted Ron Carson, president of Carson Wealth Management Group of Omaha, Neb., which manages more than $2 billion in assets. “I’ve turned another 12 shades of gray since all this has happened,” he said during a conference call.

Still, some advisers remain sanguine.

“I believe that we are near bottom,” said Tom Hepner, an investment adviser with Ruggie Wealth Management LLC in Tavares, Fla., which manages $250 million in assets.

Putting the decline into perspective, one Morgan Stanley broker, who asked not to be identified, is telling clients: “‘We’re just back to 2003 levels, folks. Sit down, take a breath; it’s only five-year lows we’re looking at.’”

Sue Asci, Andrew Coen, David Hoffman, Jed Horowitz, Dan Jamieson, Davis D. Janowski, Bruce Kelly, Darla Mercado, Charles Paikert, Lisa Shidler and Aaron Siegel contributed to this story.

E-mail Janet Morrissey at [email protected].

Advice on advice What are you telling your clients in the wake of the market meltdown? Speak out at investmentnews.com/community.