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Financial Planning > Tax Planning > Tax Loss Harvesting

Advisors Expect Politics to Drive Volatility in 2017: Atomix Survey

By Emily Zulz

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Advisors are expecting politics to be a major driver of volatility in 2017, according to the latest Eaton Vance Advisor Top-of-Mind Index (Atomix) survey. In fact, “managing volatility” emerged as advisors’ top concern, rating 114.5 on the Atomix scale.

The quarterly survey of more than 1,000 financial advisors found that 65% of advisors indicated the new presidential administration will be a major driver of volatility in 2017.

(A month into the new administration, though, volatility has remained low.)

“Advisors are telling us they are approaching 2017 and the new administration with a sense of cautious optimism,” John Moninger, managing director of retail sales at Eaton Vance, said in a statement. “Politics have moved to the front of the national discussion right now, and advisors are addressing the topic to better understand client motivations and financial planning concerns.”

According to the survey, 63% of advisors reported discussing politics with their clients in the context of investment choices. Nearly one-sixth of advisors surveyed (17%) raised the topic of politics with almost all of their clients, and 16% reported that they used political conversations to better connect with clients.

Advisors are also watching the Federal Reserve’s decisions on interest rates as a potential driver of volatility. According to the survey, 46% of advisors think the Fed could be a major driver of volatility in 2017.

Despite the expected uptick in volatility, advisors have adopted a positive attitude toward U.S. equities at the start of 2017. According to the survey, 56% of advisors are feeling bullish about the year ahead.

“Advisors see opportunity in equity markets, but are also aware of potential volatility and the macro challenges ahead,” Moninger said in a statement. “As a result, they are working to find ways to manage risk while driving strong results for their clients.”

The survey finds that advisors are poised to capitalize on the opportunities volatility presents, with 54% saying volatility should be both managed to avoid losses and harnessed to take advantage of opportunities.

However, the survey finds that their clients had a different view of volatility. Only 32% of advisors said their clients agree with this approach and 48% said their clients believe volatility only should be managed to avoid losses, according to the survey.

Fear is likely the culprit behind investors’ sense of caution. According to the survey, 60% of advisors report their clients are motivated more by fear than greed. Although this fear indicator has declined from a high of 82% in August, fear remained the dominant motivator.

“The current climate of elevated political uncertainty brings more potential volatility to the market, which could be beneficial for investors in search of value opportunities,” according to Moninger. “Volatile markets provides advisors the chance to really deliver value and support to clients by helping them navigate uncertainty and stay on course to meet their investment goals.”

While advisors are cautious about politics’ effect on volatility, some advisors are optimistic that President Donald Trump’s tax policies will have a positive effect on the market, with 25% saying corporate tax reform will be the top catalyst. While 23% of advisors think Trump’s tax policies will reduce taxes for individuals, advisors do not anticipate changing their strategies for tax management. The survey finds that many advisors are considering the same strategies to help clients reduce tax bills that they implemented last year, including tax loss harvesting (31%), followed by tax-managed equity funds (21%) and municipal bond funds (21%).

When asked specifically about their attitudes about municipal bonds, advisors said the asset class is the preferred method for reducing overall tax exposure.

Advisors also view municipal bonds favorably in a rising interest-rate environment, with 31% reporting they have recently increased allocations to municipal bond funds to help hedge against future rate hikes.

According to Craig Brandon, co-director of municipal investments for Eaton Vance, this may be an opportunity to enter the muni market.

“Given the muni market’s historical resilience, we believe the short-term reaction after the U.S. election provides tax-sensitive investors a chance to scale into munis at higher yields and cheaper valuations,” Brandon said in a statement. “This opportunity must be somewhat tempered by the backdrop of heightened uncertainty, particularly around President Trump’s agenda and proposals. However, increased infrastructure spending would generally be a credit positive for the municipal market.”

Eaton Vance contracted with a third party to conduct the online survey from Dec. 9 to Jan. 9. Atomix uses a methodology similar to that of the U.S. Consumer Confidence Index in that it calculates a weighted average of current perceptions and what advisors think about the trends.

—Read last quarter’s findings here: Advisor Top-of-Mind Index: Volatility, Election, Fed

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