Financial advisers eager as economy nears its stride

Ready to run: Financial advisers eager as economy nears its stride

Crain's Detroit Business- September 23-29, 2013

by: Tom Henderson

There's still a sense of jogging in place among local financial advisers, although many say they are starting to feel a firmer footing that promises a faster economic pace, and more investment opportunities, next year.

Many of the 15 advisers interviewed by Crain's said they are more confident about the economy than they were a year ago and are far more confident than they were two years ago that the U.S. will avert a double-dip recession.

They also mostly agree that next year probably will be a sluggish repeat of 2013 for the U.S. economy. It will plod along in the 2 percent growth range for gross domestic product, they say. And monthly employment numbers will show steady growth — but well short of the growth in every other post-recession recovery since the Great Depression.

And yet, there's a sense of optimism that has been absent for years.

"Look at the fundamentals," said Daniel Thomas, president of the Thomas Financial Group LLC in Troy. "The housing sector is finally contributing to growth. Auto sales are strong. Business investing is up.

"The things we're most excited about is we've had 41 straight months of private sector job growth, and consumer confidence is at a 51/2-year high."

Ronald Eppler, a financial adviser with Wells Fargo Advisors in Ann Arbor, said: "The fundamentals of the economy are a lot stronger than the negatives. Business confidence is up and capital spending is beginning to increase.

"The biggest difference I see from a year ago is that CEOs are a lot more confident, and they're sitting on a lot of cash, which will stimulate the economy."
Said Nancy Meconi, a partner at Plante Moran Financial Advisors in Auburn Hills: "I'm generally positive. It won't be like the good old days any time soon, but I believe in the U.S. economy, and I think it will prevail.

"The economy has somewhat stabilized. There are still significant threats, but we've turned the corner."

Pete Gargasoulas, vice president and senior portfolio manager at Fifth Third Bank in Southfield, said: "We're seeing global growth. Slower growth than we'd like, but growth nonetheless. The next 12 to 24 months will provide for faster, better growth.

"You'd like to see 3 1/2, 4 percent growth in GDP. And we won't get to that next year, but we will be above 2 percent."

Dennis Johnson, a senior vice president at Comerica Bank and chief investment officer at the Comerica Asset Management Group, sees the U.S. economy continuing to expand the rest of this year and next. "Certainly north of 2 percent," he said.

Johnson said the economy is being stabilized in part because state and local governments have ended their cost cutting of the past few years as housing has rebounded and tax revenue has increased.
Other financial advisers were a bit more muted in their outlook.

"We'll see continued sluggish growth, but slightly better than it has been," said Anne MacIntyre, president and CEO of Sterling Heights-based Annie Mac Financial LLC.

"We'll keep grinding along," said David Sowerby, chief market strategist and portfolio manager in the Bloomfield Hills office of Loomis Sayles & Co. LP. "In Michigan terms, it's driving in the middle lane at 55 miles an hour."

Michael Dzialo, president of Managed Asset Portfolios LLC in Rochester, thinks it's more like going 35 mph in the right lane.
"I used the term 'growth recession' last year, and it continues this year," Dzialo said. "This economic recovery is making history.

"It's not a typical economic cycle with a 4 to 5 percent lift to end a recession," said Dzialo, who expects U.S. economic growth next year of between 1 1/2 percent and 2 percent.

The only voice of gloom among the 15 wealth managers interviewed by Crain's comes from Sam Valenti III, president of Bloomfield Hills-based Valenti Capital LLC and executive chairman of Bloomfield Hills-based TriMas Corp. Valenti was also the sole voice of gloom a year ago, when he predicted a steep but short recession that he still thinks is coming — likely next year and lasting into 2015.

On the issues of the day, there is general agreement:

• The city of Detroit's bankruptcy won't have much effect on the ability of most municipalities to sell their bonds, although rising interest rates and the expected winding down of stimulus spending by the Federal Reserve will dampen both municipal and corporate bonds.

• Advisers are far less worried about Washington now than they were a year ago, when a presidential election loomed and there were real fears about a so-called fiscal cliff that was averted at the last minute.

• Gold is something to be avoided despite a recent run-up after huge price declines.

• It's time to start looking at European equities, to continue buying U.S. equities and to keep a wary eye on equities in the so-called BRIC countries of Brazil, Russia, India and China.
Municipal and corporate bonds

"Detroit gets big headlines here, but the number of municipalities going bankrupt has a minuscule effect on the market," said Peter Schwartz, a principal in Bloomfield Hills-based Gregory J. Schwartz & Co. "The pressure on municipal bonds will come from rising interest rates, not anything happening in Detroit. Overall, munis are still a good investment."

Said MacIntyre: "Detroit wasn't a shock for the market. Detroit doesn't help because it puts fear into the market, but we knew it was coming. This, too, shall pass.

"Municipal defaults have declined four years in a row. Valuations are good for municipals; they have a limited investor base and an increase in supply. And revenues for state and local governments have gotten better, thanks to rising housing prices."

Said Eppler: "Detroit has created uncertainty, but over the long term, municipal bonds are still a very safe asset class. You won't have Detroit spill over into dozens and dozens of municipalities."

Dzialo disagreed. He said municipals offer value to those investors who need some tax-free income, "but you really need to do your homework. If Detroit can successfully navigate this and get out of it by paying bondholders 15 or 20 cents on the dollar, a lot of cities are going to be lining up."

Dzialo said his major worry is investors who think it's safe to buy corporate bonds with 20- or 30-year maturities when the Fed is getting ready to cut back on its stimulus program known as qualitative easing, a move that will mean a sure rise in interest rates.

And as interest rates rise, bonds lose value if an investor can't hold them to maturity and needs to sell.

"The corporate bond market is in a bubble equivalent to the dot-com bubble of the 1990s but more dangerous," Dzialo said. "The average investor just doesn't understand the risk."

Europe

Dzialo, a longtime investor in emerging markets, last year began selling stocks in those markets that had done well and early this year began increasing his exposure to European equities, including companies in Portugal, Ireland, Greece and Spain.

"Good European stocks are selling at a 30 to 40 percent discount to their U.S. counterparts," he said.

Said Jonathan Citrin, founder and executive chairman of The Citrin Group LLC of Birmingham: "Companies are starting to look better in Europe and show more profits, particularly Eastern Europe."

"A year ago, dollars were fleeing Europe. Where did they go? The U.S., which drove up prices," said John Schindler, senior vice president of wealth management for the Birmingham-based Schindler Group, an independent company that works under UBS AG's umbrella and uses its research and technology.

"People are going to start feeling more confident about Europe and will want to move money back there," Schindler said. "We want to be ahead of that."

Gold

"Gold is the wicked stepchild right now," Citrin said. "I don't see enough market volatility to push people back into gold."

Meconi called gold "a crisis hedge and an insurance policy and should never make up a significant portion of someone's portfolio."

Schindler thinks gold should be part of everyone's portfolio. That said, "UBS is somewhat bearish on gold. It looks as if gold may have bottomed out, but I think it's too early to tell. I'm not actively adding gold yet."

Investing involves risk in regards to all of the products mentioned in this commentary. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is not a guarantee of future results.This information is not intended to be a substitute for specific individualized financial advice or an offer to buy or sell any security mentioned herein.