Financial Advisors Predict Stronger Stocks in 2023

Nearly half of financial advisors expect the stock market to rise by at least 10% next year, including 13% who foresee it rising by 20% or more, according to the new InspereX 2023 Advisor Outlook Survey.

Another 25% expect the market to be flat, while 26% expect it to be down by at least 10%.

Regarding fixed income, 74% of advisors said they expect the inverted yield curve between 2-year and 10-year Treasurys to continue into the second quarter, including 40% who expect it to last beyond the third quarter. InspereX noted that an inverted yield curve means short-term yields are higher than long-term yields, and is often considered a signal for recession.

Three-quarters of advisors in the survey asserted that inflation has peaked.

“While many advisors are bullish on stocks in 2023 and optimistic about moderating inflation, their views on a continuation of the inverted Treasury yield curve indicate that the first half of the year could be bumpy,” InspereX’s president David Rudd said in a statement.

Red Zone Marketing conducted the survey in mid-November among 270 financial advisors from independent and regional broker-dealers, banks and RIAs.

Shocking Fixed Income Volatility

Seventy-seven percent of advisors in the study said their clients were shocked by the volatility in the fixed income market in 2022, but 78% also said their clients were not too put off to invest in fixed income right now. Indeed, 53% noted that their clients are more comfortable with volatility than they were in the past.

Fifty-nine percent of advisors said their clients are jumping at fixed income offerings with potentially higher yields. In fact, 88% maintained that today’s higher fixed income interest rates create better client conversations.

In addition, 69% of respondents said their clients will use fixed income for tax loss harvesting this year, and 53% foresaw a years-long recovery from the fixed income losses of 2022.

“Interest rates rose quickly in 2022, negatively impacting existing bond holders,” Rudd said. “But advisors are recognizing and taking advantage of numerous opportunities for their clients, including harvesting tax advantages.”

Importance of Individual Bonds

The survey found that 68% of advisors are using individual bonds with their clients at present, including 85% who are using Treasurys, 77% municipals and 75% corporates.

Advisors who use bonds cited these benefits that individual bonds deliver:

• Predictable income: 85%
• Return of principal at par: 82%
• A way to demonstrate value to clients: 37%
• Transparent pricing of new issue bonds: 36%
• Easy to monitor: 33%

Fifty-six percent of respondents said income is their clients’ main reason for wanting individual bonds, and 23% said the main reason is diversification.

Advisors in the survey also believe that individual bonds improve client relationships, help hedge inflation and add alpha.

To help their clients invest in individual bonds, 82% of advisors said they use bond ladder strategies, but only 46% said they have the necessary tools to build ladders themselves.

InspereX said advisors and their clients should always discuss the risks of bond investing, including the credit risk of the issuer, interest rate risk and liquidity risk. Bonds are intended to be buy-and-hold investments, it said, adding that investors should consult with a tax adviser about the consequences of particular bonds.

Among the 32% of advisors who reported that they do not use individual bonds with clients, 38% said clients do not ask for them, 33% said managed products make their life easier and 32% said they are too time consuming to evaluate.

Fixing the Fixed Income Market Experience

Asked what could make the fixed income market work better, advisors put the following items on their wish list:

• Easier-to-use technology providing greater efficiency: 55%
• Pricing transparency: 42%
• Technology that drives performance and reduces risk: 33%
• Access to new issue bonds: 32%
• Better way to document best execution: 23%

When evaluating potential fixed income technology solutions, the advisors ranked these characteristics in terms of importance: cost, ease of implementation, integration with their other systems, access anywhere on any device, functionality that works for them and has the products they regularly use.

“Overwhelmed by choice, uncertain about fixed income pricing transparency, and burdened by documentation requirements, advisors are eager for intuitive technologies that fit seamlessly into their workflows and let them cut to the trade,” Nicholas Whiteley, InspereX’s head of fixed income technology, said in the statement.

“They understand that improving efficiency can generate alpha by letting them do more of what they do best: helping clients meet their financial goals.”