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Advisors Focus on Markets and Downside Protection: Fidelity

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Advisors are now more concerned about government policies and the economy, portfolio management and volatility than they were in the first quarter, according to the Fidelity Advisor Investment Pulse survey for the second quarter.

“The best advisors are looking at high equity values and low volatility, focusing on making sure portfolios are diversified and talking about investment plans and goals with clients so they don’t overreact if patterns reverse,” says Robert Litle, head of Intermediary Sales at Fidelity Institutional Asset Management.

(Related: Stock Strategists Are Getting Nervous About the Market)

They’re reacting to investors’ concerns about a potential pullback given the strength of the markets and low volatility, Litle tells ThinkAdvisor.

(Related: Fidelity Redefines the Future Value Proposition for Advisors)

What advisors are far less concerned about compared with previous quarters are rising interest rates, according to the Fidelity survey. Interest rates fell to ninth place among advisor concerns from third place in the first quarter, and inflation was at the very bottom of the list, at No. 14, receiving no votes from advisors.

(Related: Fidelity Trims Index Fund Fees, Challenging Vanguard)

“We’ve been conditioned for that to be a dominant concern,” says Litle, but those concerns have diminished because the pace of rate increases has been slow. In the past advisors were especially concerned about spikes in rates, which would hurt bond prices as well as utility stocks, considered bond proxies, says Litle.

(Related: Fed Raises Rates, Lays Out Plan to Cut Balance Sheet)

But interest rates didn’t spike. They actually fell for long-term bonds in the second quarter and rose only slightly on the short end, following the Fed’s 0.25% rate hike in June. And in July, Fed Chair Janet Yellen told the House Financial Services Committee that the central bank is “watching very closely” where inflation is headed, indicating concern about the low inflation rate. (In the second-quarter GDP report, core PCE, the Fed’s favorite inflation indicator, rose just 1.5%, well below its 2% target, for the 12 months ended June 30.)

Yellen’s remarks and the latest inflation numbers have reduced expectations for more Fed rate hikes this year. The latest CME FedWatch, based on federal fund futures rates, shows that market participants overwhelmingly expect no rate action from the Fed at its September and November policy meetings, and less than half anticipate another hike in December.

On the long end, the 10-year Treasury yield is near 2.25%, well below the 2.6% level reached in early March.

“It may be healthy to be less fixated on rising rates,” says Litle.

But the decline in bond yields coupled with concerns about equity market levels and possible downside risk — the fourth and third biggest concerns among advisors — increased advisors’ concerns about yield and income for their clients, which moved up to sixth place in the Advisor Pulse rankings, from number 11 in the first quarter survey.

The Fidelity survey is based on responses from about 130 advisors. It asks basic questions and doesn’t dig deeply into responses but Litle suspects that advisors’ No. 1 concern, about government policies and taxes, is related to the Labor Department fiduciary rule and tax reform plans.

-– Check out Fed’s Bullard Says Low Inflation Warrants Keeping Rates on Hold on ThinkAdvisor.


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