Advisor Intelligence

On Gov't Shutdown, Advisors Brace Clients for Short-Term Volatility

While most advisors believe the government shutdown will be a non-event, some are bracing clients for some short-term market volatility due to the uncertainty in Washington.

“Inflation remains low, economic indicators are generally positive, corporate balance sheets are still healthy, and the Fed seems to be in no hurry to taper,” said Robert and Thomas Fross, owners of Fross & Fross Wealth Management, in an update to clients. “That being said, it's never possible to predict the direction of market movements, and we caution our clients to prepare for additional bumps in the road ahead.”

“Although we believe that this crisis (along with the debt ceiling battle that will take place later this month) will pass, we are concerned that these ongoing partisan battles in Washington will have a modest, but not insignificant, effect on consumer and business confidence,” said Gerard Klingman of New York-based Klingman & Associates, in a client note.

Klingman said markets may react violently in the short term, as we experienced at the end of 2012 with the expiration of the tax code. In response to rising interest rates, his firm is holding the highest amount of cash in their model portfolios than ever before, he said.

David Shepherd, president and CEO of Shepherd Wealth and Retirement in Tucson, Ariz., said the shutdown was a “non-event, political drama,” and that only one client has asked about it. If the economy slows or starts to go into a recession despite all the Federal Reserve’s stimulus efforts, then we should worry about a market pullback, he added.

That said, Russ Koesterich, chief investment strategist for BlackRock, argues that the potential risks are not yet priced into the stock market.  

“Those investors uncomfortable with volatility should consider getting a bit more defensive, possibly raising cash, while those with longer-time horizons can probably use the market angst around the U.S. budget issues as a buying opportunity,” he said. 

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