2nd Half Money

Twenty financial advisers share their strategies for what to do next
Illustrations by Saul Herrera 2nd Half Money
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The past year’s dramatic recovery in stocks now in the rear-​view mirror; so what lies ahead for investors? Pittsburgh Quarterly asked a group of regional experts what they expect in the second half of 2010. Specifically, we asked how they view the markets and economy and what they’re recommending in terms of sectors and strategies.

Not included in the following is one thing that financial advisers and money managers uniformly recommend: Develop a financial plan that suits your particular situation.

Richard Applegate | First Commonwealth Financial Advisors

The overhanging economic issue of the remainder of 2010 will continue to be job growth. Growth in our economy requires consumer participation, but if job security remains a concern, consumer confidence will falter. Many people have been out of work since the recession began, and it could take a long time before employment and the confidence to spend return to a comfortable consistency. Nonetheless, there are opportunities. Success will come from careful stock-​by-​stock selection, not by investing in broad stock market indexes. This environment necessitates active portfolio management where stocks are carefully selected, monitored and sold at predetermined strike prices.

Look for upticks in government bond yields; we expect a continued demand for commodities and consumer staples in the emerging markets; and technology stocks remain attractive as companies prepare for an eventual economic rebound.

James Armstrong | Henry H. Armstrong Associates

When asked to make economic forecasts for the next six months, we always have to point out that the past record of accuracy in short-​term forecasts has been very poor. That said, we are currently investing and managing money for clients. What we try to do is to identify the strongest companies in the world — which are few in number. They possess dominant competitive positions, they have fortress-​like balance sheets (tons of cash and little debt), and they have broad global reach, which allows them to focus their sales efforts in countries where demand is growing. Given such strong positions, these companies can prosper and take market share from their weaker competitors, no matter what economic conditions the next six months may throw at us.

Nadav Baum | BPU Investment Management

With proper asset allocation, a comprehensive plan and consistent monitoring, you will have the necessary components in place to help you through the ups and downs. And with a sound investment strategy with strict discipline, you will never lose sight of your goals and dreams. To quote Warren Buffett, “Be greedy when others are fearful.”

Equity markets continue to be poised for another positive year. We are experiencing an economy that is slowly repairing itself with the help of cash-​rich, blue-​chip companies reporting strong earnings. Foreign markets also are garnering extensive interest. I continue to keep a substantial allocation in foreign equities and use a tactical allocation in alternative investments, i.e. commodities and other non-​correlated asset classes. In fixed income, I use shorter maturities as interest rates begin to trade higher to lock in higher rates down the road.

Don Belt | Hefren-​Tilotson

Following one of the strongest post-​bear market rebounds in history, we would not be surprised to see a correction in stock prices during what has historically proven to be a seasonably weak period between May and October. We suspect weakness will set the stage for a fourth-​quarter rebound, led by areas like emerging markets, international small caps and commodity-​related areas, which have favorable long-​term outlooks.

A setback in stock prices would signal an upcoming moderation in the pace of the economic recovery, which should ultimately prove sub-​par by historical standards. Interest rate and inflation pressures should remain modest through the current year, setting the stage for challenges on these fronts in 2011 and beyond. We expect ongoing dollar weakness against Asian and commodity-​based currencies.

Robert Bruce | Integrity Wealth Consulting

In today’s environment, investors need three, not two, asset classes. In addition to stocks and bonds, alternative investments may be ideal for a truly diversified portfolio. In 2008, stocks and bonds fell dramatically, but the pain was not equally felt by all. Properly used alternative investments lessened the pain for many. Of course, past performance is no guarantee of future results. Various alternative strategies are implemented using everything from commodities, real estate and precious metals to futures contracts. They have a common goal of adding value without moving in unison with either stocks or bonds. A financial consultant experienced in asset allocation and alternatives can help explain their complexity and expenses. Once only in the domain of huge institutional investors, these strategies are available for most investors.

Linda Duessel | Federated Investors

I think the economy and stocks will surprise to the upside this year. We clearly have been enjoying a cyclical rebound. Inventories, after a record depletion, are in a substantial rebuild; capital spending is surging; manufacturing is expanding; corporate profits continue to positively surprise; and inflation remains benign around the world. Moreover, we’re finding evidence of a consumer who wants to spend — noting the high-​end consumer swings discretionary spending in this economy. Luxury retailers in particular have been reporting better-​than-​expected sales.

Longer term, mounting record public debt from existing entitlements and yet another new one are major worries. The piper will have to be paid, but we won’t worry about this until we see the whites of his eyes. Our model portfolios are substantially overweight in equities, with a bias that’s starting to shift to growth and larger stocks as the recovery takes hold and market momentum builds.

Michael K. Kauffelt II | Bill Few Associates

The financial markets’ recovery through early 2010 has exceeded most expectations in every measure but employment.We expect this trend to continue unevenly through the second half of 2010.

We expect the stock market and other broad indexes to be higher at the end of the fourth quarter than they were in the first quarter. Fixed income markets should remain fairly stable as the Fed is committed to low interest rates for an extended period of time and inflation is being held down by high unemployment.

This economy has been helped over the past two years by a lot of government support (think training wheels on a bicycle) that is slowly being withdrawn. The second half of 2010 will be stronger if the economy continues to recover while learning to ride without training wheels.

Bob Kopf | Smithfield Trust Company

Elmer fudd is, for some strange reason, my favorite cartoon character. Elmer famously admonished his audience “…be very, very quiet, I’m hunting wabbits…” If Elmer were hunting investment returns instead during the ensuing six months and beyond, I am confident that he would, like me, substitute “careful” for “quiet” in his admonition.

What does the word “careful” actually mean for Elmer and Smithfield Trust Company in connection with the formulation of a prospective investment strategy? First, implement an asset allocation with an overweight to bonds and alternative investments with a concomitant underweighting of equities. Don’t worry about not catching all the upside in a rally in equities. Resist following any hard consensus from the chattering nabobs on Wall Street. And, above all, think of Elmer Fudd.

Jack Kraus | Allegheny Financial Group

The economy has turned the bend, and though it hasn’t been officially announced, the recession probably ended last summer. This recovery will be more elongated than a sharp, V-​type of recovery, allowing the Fed to keep short rates very low for an extended period of time. Probably in early 2011, short rates will follow intermediate and long rates by moving up. How much rates rise depends on inflation expectations. We expect subdued inflation for another couple years as high unemployment is slowly reduced. The stock market is poised to do well with any growth in earnings, since companies have made themselves very lean. Any uptick in business will mostly fall to the bottom line. We are cautiously optimistic about the remainder of 2010 and recommend clients stick to their long-​term strategies.

Douglas Kreps | Fort Pitt Capital Group

Stubbornly high unemployment. Sluggish home sales. European debt crisis. Our own government debt. Investors likely will continue to face these headwinds into 2011.

We believe that large, multi-​national U.S. stocks will continue to perform well. The global growth story, especially in the emerging markets, is still intact, and this will benefit firms like Boeing, IBM, Microsoft and GE. In addition to robust overseas sales, a potential economic recovery in the U.S. will help their revenue growth. And all four firms pay dividends.

Our other main focus is international and emerging markets stocks. Developed markets like Germany, Japan, and the UK provide opportunities to own world class companies. Additionally, exposure to the fast growing emerging markets like Brazil, China, and India provide investors exposure to some of the most dynamic and growing population centers on Earth.

Mark Luschini | Janney Montgomery Scott

Economic growth will continue through the year. However, the contour of its pace will be predicated upon conditions within the labor market. Signs of job growth will lead to improved confidence among consumers and businesses, an important ingredient to building a self-​reinforcing expansion. We expect equities to drift higher, albeit nothing rivaling the returns of 2009, and favor large, high quality companies, many of which can be found in the industrial, technology, energy and healthcare sectors. Regarding fixed investments, continued low yields on short-​term instruments make select municipal and corporate bonds appealing. Other potentially rewarding areas for investment include foreign markets, particularly those countries that are natural-​resource-​laden, and precious metals, which should do well if retail and industrial demand grows.

Christopher S. McMahon | McMahon Financial

Looking ahead, we are optimistic about the capital markets. That said, there are a number of issues that we are keeping in mind: When will the Fed raise rates? And if so, how fast? The deficit and what its effect on the tax rates will be. The jobless rate and how its elevated level restrains consumer spending. In spite of these concerns, making sure that you have a defined financial plan in place and sticking to it seems to be the answer. Investors who know their long-​term goals and have in place the strategies they need to meet those goals are the ones best suited to make progress without suffering through the angst of the stock market’s daily and even monthly twist and turns.

Stuart Miller | Private Wealth Advisors

The threat of the financial/​economic world unraveling is over. The residual effects (unemployment, housing, government debt etc.) will linger for years. Stocks will likely continue their gradual rise until later in the year when chances of a correction increase. Fixed income will be dogged by low yields and the threat of higher rates damaging portfolios.

We are overweight in fixed income, with 60 percent of this sector in a high-​quality bond portfolio (three– to eight-​year maturities) and 40 percent in floating-​rate bonds, high-​yield bonds and a hedge of long treasuries. Do not use Treasury Inflation Protected Securities (TIPS).

We are underweight in equities, but within equities, we are overweighting consumer staples, healthcare (ex. insurance or HMOs) and technology. We are underweighting financials, energy, materials and industrials. Buy large U.S. multinationals with extensive sales outside the U.S., particularly in emerging markets. Avoid small-​cap and international funds. Write covered calls or employ an option collar.

Anthony Pratt | Citizens Wealth Management
The economic turn-​around is for real. As the year progresses, we will see an improving labor market resolving doubts about a sustainable recovery. Given the amount of slack in the economy and absence of inflation, the Fed will remain on hold for at least six months, providing a favorable investment backdrop. With growth exceeding expectations, equities should continue their run, with economically sensitive issues remaining in favor. We prefer the U.S. among developed economies, and we see opportunities in Asia.

Low yields pose a challenge for fixed income investors. While bonds will probably be range-​bound for some time, it stands to reason that, with stronger growth, yields will have an upward bias as Fed tightening approaches. We would keep maturities relatively short.

Michael Saghy | PNC Wealth Management

We believe that the market recovery coming out of the financial crisis will continue as we progress through 2010. Our sustainability indicators and economic outlook point to an economy moving from the “dark side” of a deep recession toward the “light side” of a
self-​sustaining economic recovery.

There are three positive main parts to our sustainability indicators: housing — the stabilization of this segment is imperative to calming the financial markets and supporting consumer net worth and confidence; consumer spending­ — this accounts for a majority of GDP growth, an important piece of sustainability; and jobs — employment is the most crucial, but volatile, piece to the sustainability puzzle.Our baseline view is for a sustainable economic recovery, but we are mindful of the downside risk to our expectations. A correction should not come as a surprise and, taken in isolation, is no reason to alter current investment allocation to equities.

Berndette Smith | Fifth Third

We’re optimistic about stocks and the economy, yet pessimistic about bonds. We expect inflation and interest rates to rise, so we’re limiting bond maturities to three to seven years. Given increasing budget pressures for federal and municipal governments, we prefer high-​grade corporate bonds with superior credit ratings.

We are underweighting bonds and overweighting stocks with a bias toward domestic vs. international and value vs. growth. We favor high-​quality, dividend-​paying stocks with global markets and companies that fare well in late stage bull markets (e.g., industrials and materials). We’re cautious about Europe with its slow growth and sovereign debt. With rising rates, we expect China and India to cool their economies to stave off inflation. We favor markets that produce and export commodities — Brazil as an emerging market and Australia as a developed market.
We’ll also increase inflation hedge weightings (i.e., REITs, commodities, TIPs and precious metals).

Erich Smith | BNY Mellon

We think the U.S. economy will expand 34 percent in a subdued recovery this year with relatively low inflation. Depending on each investor’s situation, we recommend a diversified portfolio that includes both U.S. and international equities, as well as spread products. Hedge is not a four-​letter word: we also think Treasury Inflation Protected Securities or TIPS offer a hedge against inflation. It’s important for investors to:

  • Understand risk and your particular tolerance for it. During the crisis, some panicky investors pulled out only to miss the rebound.
  • Know what you own. Understand what your investments are and the role of each in your portfolio.
  • Stick to a long-​term investment plan, with room for taking advantage of short-​term opportunities that come up in a volatile market.

John Staley | Staley Capital Advisors

We base portfolio decisions upon longer-​term themes and fundamental value. Our current focus is on high quality U.S. multi-​nationals, which we view as undervalued and which over the longer term will benefit from the emerging consumer class in developing economies. We view emerging market equities as a core portfolio allocation but are tempering exposure due to risk/​return concerns following their sharp appreciation. Within bond allocations, we are somewhat sidelined in short-​term higher quality instruments while waiting for higher rates. In our opinion, the extraordinary opportunity in less credit-​worthy bonds has largely run its course. With the strong appreciation in asset prices over the past year and the numerous issues still on the horizon, our current strategy is, succinctly, “participate but don’t reach.”

Jeff Wagner | F.N.B. Wealth Management

Rebounding large company earnings and their effect on stock prices has led to a sense of normalcy. However, investors are questioning these trends. And concern is growing about the increased debt accumulated by countries, states and municipalities globally.

We feel that positive economic growth and higher corporate earnings will continue. Earnings should lead to better employment numbers and a very gradual improvement in housing. We’re emphasizing the more cyclical areas of the global market such as energy, basic industry and technology.

Longer term, we believe governmental debt load will be a game changer but not a game breaker. It will likely lead to a decline in global productivity and slower-​than-​normal growth. We anticipate U.S. GDP growth of 23 percent instead of the typical 45 percent after a recession. Though not optimal, the slower growth may keep inflation under control and lead to a continued positive environment for stocks.

Tom Wentling | UBS Financial Services

The litany of awfuls is endless (unprecedented peacetime federal, state, and local debt, leveraged personal balance sheets, high unemployment, strapped consumers, foreign competition…) and yet…

Market valuations are not stretched — not cheap — but not stretched. The S&P 500 lost money at a negative 4.65 percent annual compound rate for the 10 years ending March 31, 2009, which was worse than any 10-​year period of equities going back to 1835, prior to the Civil War. The next 10 years should be significantly better than the last (so sayeth probability theory), and so should the second half of this year, as earnings rebound against very easy comparisons. Now — not when it’s apparent — is the time to add inflation hedges to your portfolio, as well as increase your exposure to the “Emerging Markets.”

PQ Staff

Questions or corrections? Contact us at .

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