Managing $1 billion in client assets, UBS Financial Services advisor Jonathan Murray heads into 2018 feeling “cautiously bullish” about the stock market, as he tells ThinkAdvisor in an interview.
Overvaluation threatens to become a concern, and Murray, named a top advisor by both Barron’s and The Financial Times, is “ever-vigilant” to this potential catalyst of a major market downturn, he says.
In the interview, the wealth management specialist, who heads the 9-member Murray Group in Hunt Valley, Maryland, names market sectors he expects to outperform next year. They include financial and consumer discretionary stocks.
Joining the conversation is UBS senior lobbyist John Savercool, who discusses industry regulation; for instance, what can be expected next year, the government’s review of mandates that went into effect over the last decade and the future of the Dodd-Frank Act, which a campaigning Donald Trump declared he would repeal.
Murray, 55, whose financial and economic commentary is heard daily on WBAL radio, works with endowments, businesses and high-net-worth families. He was previously an advisor at Legg Mason and Kidder, Peabody & Co. Jonathan and his identical twin brother David, also an FA, wrote “Two for the Money: The Sensible Plan for Making It All Work” (Carroll & Graf 2006).
Washington, D.C.-based Savercool, 58, directs UBS’ lobbying and political efforts at the federal level. Before embarking on a career in the private sector in 1999, the firm’s first full-time lobbyist served for 32 years in Washington at posts with, among others, Sens. Phil Gramm and Kay Bailey Hutchison.
ThinkAdvisor spoke by phone on Dec. 19 with Murray and Savercool, both managing directors. In the interview, Murray offered end-of-year advice for investors, like recognizing value in beaten-up market sectors such as energy and telecommunications. Here are highlights of our conversation:
THINKADVISOR: How will President Trump’s tax cuts impact the market?
JONATHAN MURRAY: We expect profits in the stock market to increase by an additional 8% because of tax reform — not insubstantial. Domestic companies should be the biggest beneficiaries due to the lower domestic corporate tax rate from 35% decreased to 21%. In the S&P Index, roughly 65% of sales come from within the U.S.
Which market sectors should benefit most?
Financial stocks because of their large domestic exposure, and they’ll also benefit from an increase in interest rates that help economic growth. Bank stocks and consumer discretionary companies, like retailers, should do well. Media companies and transportation companies, especially railroads, which generate nearly all their revenues domestically, should see their earnings increase more than average as a result of the tax reform.
What are some actions that investors can take before the end of the year to help them reduce their 2018 tax bills?
I don’t think folks should be in a mad scramble to do everything for tax purposes if it keeps them out of their long-term financial plan. That is, they shouldn’t let tax planning trump investment-management planning.
What’s one thing they could do?
Now is a very good time to take losses to offset capital gains. We’ve had a remarkable year in the market. Many mutual funds have had very large capital gains distributions because stocks have gone up. If [not addressed], that could lead to a substantial tax bill, which people might not be aware of.
Investors should now consider tax-free municipal bonds because they represent very attractive value versus taxable bonds, according to our analysts. They’re advising investors to rebalance and commit to those sectors that haven’t participated in the big rally we had during the past year. So we see value in beaten-up stocks in the energy and telecommunications sector.
Clients may be confused when they hear experts say that a big correction is coming soon. What are your thoughts about that forecast?
Our chief investment strategist Mike Ryan just wrote a piece called “So When Will the Music Stop?” He says there are four catalysts that can cause the market to go down. One is an imminent recession. We don’t see signs of an imminent recession. In fact, third-quarter GDP shows that the economy grew at 3.3%, the fastest pace in three years.
What’s the second catalyst?
A monetary policy misstep: If the Federal Reserve raises interest rates too quickly, that can snuff out economic growth. The new fed chairman [Jerome Powell] has a very steady-as-she-goes approach, similar to that of [current chair] Janet Yellen. So we don’t think interest rates will be raised aggressively. Our analysts are calling for three small interest-rate hikes of 25 basis points each in 2018, which we feel won’t slow down the economy.
What are the two other catalysts?
Overvaluation, where stocks get really expensive. That’s usually present for an economic or market downturn. And it’s something we need to be mindful of. We’re getting close to that becoming a concern. But I’m not overly worried because corporate earnings continue to be very, very strong. However, we’re now at a price/earnings ratio of almost 20 times earnings; and historically that’s getting a little overvalued. So I’m cautious about this third potential catalyst.
And the fourth?
This is one we have no control over: an exogenous event, like a North Korea situation or Trump doing something stupid. That certainly could send things down and stop the music. But it isn’t wise to manage portfolios based upon the possibility of something that’s out of your control.
Where does the issue of financial industry regulation stand?
JOHN SAVERCOOL: There’s a lot of activity going on with regard to regulation at the various regulatory agencies, but it’s all a review of the new regulations that the industry was subject to over the last decade or so. The Labor Department’s fiduciary rule has been delayed, but down the road we’ll see some further attention to this.
Will any new regulation surface next year?
Just some modest reform. Maybe the Senate will pass the bill that provides some relief to smaller banks, and perhaps there’ll be some administrative or executive action to provide some very modest relief.
As UBS’ senior lobbyist, what are you lobbying for or against?
Mostly financial services regulatory reform issues — finding that balance of protecting the industry, protecting consumers and placing a burden on [the industry] that’s reasonable [in order to] provide some stability in the regulatory system.
If anyone wants to change a big issue that relates to Dodd-Frank, either relaxing some of the requirements or increasing them. We tend to get involved in those discussions and tell lawmakers how we’re dealing with regulations and whether we think they’re reasonable or not and how they might be improved.
What regulatory changes that President Trump made in his first year in office benefit advisors and/or investors?
Regulatory reform has been a key theme. He has suspended the Labor Department’s fiduciary rule, with most of it being delayed until July 2019 while the administration studies the impact on advisors and clients.
Do you consider that rule beneficial?
We consider it a good decision to delay it because the preferred solution, at least with advisors who I speak with, is to have the SEC issue its own fiduciary rule that would be applicable not just to retirement accounts but to all other taxable accounts as well. We think it would be the better solution than having separate agencies construct different rules for different products. So that would be good for investors and advisors, though I know there’s a difference of opinion among some [in the industry].
In campaign speeches, Trump promised to repeal Dodd-Frank. Can he do that?
Repealing Dodd-Frank would require an act of Congress. The reality is that there aren’t enough votes in the Senate to repeal it. There are enough votes in the House; and in fact a House committee has passed a major overhaul, an alternative to Dodd-Frank. But that bill would never pass the Senate. A more modest bill has passed a Senate Committee.
What are the implications of all that?
There’s bipartisan support for some very modest reforms to Dodd-Frank, mostly impacting smaller banks. I think that next year the administration will provide most of the action on Dodd-Frank, though it will be limited.
What’s the administration doing about Dodd-Frank right now?
Reviewing the major provisions and issuing a series of reports about regulation in general and how it impacts the industry and consumers. We think it’s sensible to review any law that’s as large as that and has so much impact. We don’t know what the result will be of the Treasury Department studies, but they’ll review possible reform options over the next year or so.
What’s the status of regulation relative to small businesses?
MURRAY: My clients who are small-business owners aren’t seeing [more] regulation impact their companies. They say that the removal of that concern, which had been on their plates for the past couple of years, had become a little too burdensome. The Small Business Optimism Index just hit a 34-year high.
SAVERCOOL: Business owners of all sizes will tell you how relieved they feel by not having to deal with new regulation. They think the pendulum had swung out of whack and that now it’s coming back to a more reasonable range, where they can think about business decisions without fear of having a new regulation to pay for and deal with. They’re in a pretty good spot right now in terms of that.
MURRAY: A Business Roundtable survey of chief executives in many industries, released in December, found that for the first time in six years executives didn’t cite regulation as the top cost pressure facing their companies. That speaks to how CEOs across the board seem to be energetic about a lessening of regulatory cost pressure.
So, Mr. Murray, are you bullish about next year?
Cautiously bullish. Steady-as-she-goes but ever-vigilant.
What’s the biggest challenge for financial advisors in 2018?
For me, it’s managing client expectations. [John] talked about how the pendulum swings in terms of regulation. That same pendulum can swing in terms of investor expectation. I worry that when folks get their year-end statements and see the tremendous gains they’ve had this year — up to 20-some percent — they’ll begin to do what people always do after big, long bull markets: Start to extrapolate those returns. That isn’t wise.
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