How to help protect your clients from economic and financial uncertainty

Your clients look to you for financial guidance. As their advisor, you can help them immeasurably by taking the current economic climate into account and helping them navigate uncertainties with an investment diversification strategy that includes life insurance. First, take a moment to put into context what economic risk means to them. Then, show how life insurance can add a new dimension to their portfolio that can help them hedge that risk.

1. You cannot always equate the stock market with the economy.

Often, according to Dr. Quincy Krosby, Prudential Financial market strategist, the economy and the stock market do not operate in tandem, particularly at inflection points. “For example, the stock market will typically turn positive as the data begin to get ‘less bad,’ or when the Federal Reserve begins a round of stimulus. In other words, the economy still looks weak, but investors project that growth is soon to rebound,” said Krosby, who served as Assistant Secretary of Commerce and represented the U.S. to the International Monetary Fund, in addition to many years working in capital markets. Conversely, the market can reach new highs as signs — sometimes subtle ones — suggest that the economy is losing momentum.

The stock market at the beginning of Q3 2016 appears to be hovering at new highs, but questions still remain as to whether or not the economy is significantly rebounding from a weak first half. ”While the economic data continue to improve, questions remain as to how robust the recovery will be, and if stock market valuations are too rich given economic uncertainty here and abroad,” added Krosby.

Ramifications from the Brexit vote, the upcoming election, questions focused on China’s growth, the low-interest rate environment and Federal Reserve policy all contribute to an underpinning of uncertainty for global markets.

Implications for your clients: Short-term portfolio performance may not accurately predict long-term economic trends

2. The uncertainty we face today.

“Are we seeing the beginning of a viable recovery, or is it just a short term upswing?” asked Krosby.

For example, just as it appeared that the Federal Reserve was poised to raise interest rates at some point this summer, investors and economists alike were surprised by a markedly weak payroll report of only 38,000 new jobs added in May, 2016, coupled with downward revisions for the two prior months.  The following month’s report, however, delivered a strong 287,000 added jobs with wage growth continuing to climb, albeit slowly. 

Not only were market participants caught off guard with the May payroll report, but it was obvious that the Federal Reserve was, too, as Chairperson Janet Yellen made clear that the Fed needed more time to assess incoming data.

In addition, unemployment was over 10 percent during the recession, and is now below 5 percent; however, part of this low number is due to the fact that many people simply stopped looking for work, and are no longer included in the unemployment numbers. This leads to more uncertainty. ”Why did so many people stop looking for jobs?” said Krosby.  “The participation rate — that is how many Americans are actively looking for work — at times appears stalled.”

In other words, if the economy is doing well, why didn’t the participation rate increase, even after factoring in those who retired?

Implications for your clients:  Today’s stronger economic indicators can belie longer-term uncertainty.

3. The cyclical nature of the economy

Some experts believe another recession is looming in 2017, and many experts question what form of stimulus the Federal Reserve can offer given that interest rates remain historically low.

Countries outside the U.S., including Japan and the Eurozone, have introduced negative interest rates to spur economic growth, only to find that, without demand, the policy is not working as intended.

Data in the U.S. suggest that consumer spending is strong, and with 71 percent of the economy predicated on the consumer, this is welcome news. Housing is showing momentum, as well. Similarly, manufacturing appears to be turning the corner after months of lingering at stall speed. Still, there are concerns that we may be nearing peak economic growth, with an inevitable slowdown to follow.

At some point, though, we are expected to enter another recession — just not necessarily one as deep as in 2008-09.

“Recessions are very much part of the normal business cycle, and many are mild and not long lasting,” said Krosby. “2008-2009 was definitely not the norm.”

Implications for your clients:  Recessions happen and we need to prepare for them.

Economic forecasting is not an exact science, according to Krosby. “I’m not saying that there is no importance in looking and planning ahead, but doing so always has uncertainty woven through it.”

So how can you help your clients build portfolios that, as they move toward retirement, protect them and their families from economic disconnect and uncertainty? Consider these four steps:

Step 1: Identify your clients’ concerns.