Advisors Brace for Slow Months Ahead

Advisors are expecting the summer doldrums to kick in for the stock market and the economy over the next few months, according to Rydex|SGI’s Advisor Confidence Index. The index, which surveys 150 RIAs on their views of the U.S. economy and stock market, fell 1.65 percent in May from April, the fourth straight monthly decline since reaching a four-year high in January. From January, the index has fallen 7.41 percent.

“While the companies making up the S&P 500 have logged another great round of earnings, the historical doldrums of summer will probably keep the equity markets from doing much,” said Kenny Landgraf, principal and founder ofKenjol Capital Management. “At this time, it would be prudent to show more caution and lighten up on the riskier assets until the fall.”

Marc Zeitoun, head of distribution at Rydex|SGI, said we’re likely to see advisors take a little equity risk off the table this summer and reallocate more to cash, fixed income and low-correlated alternatives, such as commodities and alternative mutual funds. Rydex found that 12 percent of advisors increased their allocations to commodities in May.

“The summer should bring more equity market volatility as the market absorbs highly variable earnings news,” said Greg Horn, president and managing director of Persimmon Capital Management.

But Horn said he’s concerned about inflation risk as well as volatility risk, so his firm is underweight traditional fixed income, overweight alternatives such as hedge funds, and market weight equities. The reason he’s not underweight equities is that he believes over the long term, equities will continue to trend upward.

Summer historically isn’t a strong period for the markets, Landgraf said. Oil and gas prices act like a tax on the consumer, so they start pulling back on spending. June is typically a slow month as investors wait for earnings reports to come out in July. With school out, people have a lot of other things going on, such as planning vacations and traveling, so volumes usually come down.

In response, Landgraf puts a portion of his clients’ portfolios into a seasonality strategy, a more conservative piece that allocates less to riskier equities and more to high yield bonds and preferred stocks. He’ll keep the portfolio on this tighter leash until about September.

The old adage ‘Sell in May and go away’ tends to hold true more often than not, Horn said, but his concern is not just seasonality. This summer, there are so many other factors at play that are weighing on the markets. Corporate profit margins are at an all-time high, and corporations can only run this lean for so long before you get a rebuttal from employees, he said. There are concerns that we might experience a double dip if Europe doesn’t turn around. The European debt crisis needs some sorting out.
Jeff Layman, chief investment officer at BKD Wealth Advisors, said that while there are macro concerns, such as Greece’s debt and some weak economic statistics, the stock market has room for further gains. Valuations are at 13 or 14 times 2011 estimates, he added, and he expects equity returns for the year in the 10 to 12 percent range. It’s true that the summer months are typically not as productive for investors, but his firm does not make decisions based on seasonality because it may or may not play out that way.

While both advisors’ stock market and economic outlooks fell for the short term, their 12-month economic outlook was up 9.54 percent, a sign that there is light at the end of the tunnel, said Zeitoun. Summer may be slowing things down, but companies are posting profits, which may help in the long term, he added.