100 advisors convene with Envestnet's Crager and Stategas' Rissmiller to share strategies for managing the market turmoil

Things are bad and will only get worse.

That was the depressing message analysts delivered at a hastily organized conference call by Envestnet Asset Management. Nearly 100 advisors were on hand for the Wednesday morning call, which Envestnet scrambled to organize when the markets began spiraling out of control on Monday.

In an economic environment so turbulent that it may well trigger another recession, stock-pickers may be the only ones to come out ahead, says Brandon Thomas, co-founder and CIO of Portfolio Management Consultants.

“It’s a great stock pickers’ market. In 2008, we had similar scenarios psychologically but active managers underperformed. This time, I’d say active management is probably a great to go in this type of environment,” he said.

Other participants on the call included Envestnet CEO Bill Crager; Jason Trennert, managing partner of independent research firm Strategas; and Don Rissmiller, the Strategas’ founding partner.

Strategems

The industry leaders have already seen advisors begin to adapt to these bumpy markets.

Thomas says he has observed advisors reacting with three different strategies.

Bill Crager: The conference call was
prompted by advisor demand.

Some advisors are rebalancing their clients’ strategic asset allocation in favor of equities. For instance, if a portfolio originally had 60 to 40 ratio of equities to bonds and cash and the advisor had changed it to 50-50 some months ago, they are now are going back to the original 60-40 mix.

Other advisors are doing the opposite, scaling back on risk in the portfolios by slashing equity exposure and reallocating to cash or non-correlated assets.

“Some clients say I don’t care what my original target allocation is – I want risk off the table,” Thomas says. “There are many investors in this camp and this may be the most prudent thing to do.”

Finally, some advisors have doubled down on equities, buying even more on behalf of their clients because they believe equities may be undervalued. “It’s a very opportune time to buy equities,” he says.

Hot large-caps

Thomas sees promise in large-cap stocks, which have outperformed small-caps recently. He thinks domestic large-caps are likely a better bet than international ones. “I’d say domestic stocks provide better outlook than Europe given what’s happening there,” he says.

Further, Thomas says despite a slowdown in emerging markets, he thinks an overweight in emerging markets makes sense.

Political wrangling

Jason Trennert: We are almost baking
in a cake of political uncertainty
that will make it hard for
large companies to hire

The patchwork bill legislators approved last week to address the debt ceiling has only created more uncertainty, which means more volatility in the market, says Trennert.

“We are almost baking in a cake of 2 1/2 to 3 months of political uncertainty that will make it hard for large companies to hire,” he says. “No large business that is behaving rationally is going to do large-scale hiring.”

Trennert says his firm had been saying there was a 20% chance of another recession by 2012. Now, that’s been raised to a 35% by 2012 and a 60% chance by 2013.

Delivering more gloomy news, Trennert says not to expect the restoration of S&P’s Triple A rating anytime soon. Historically, he says, the fastest any country has retrieved its Triple A status has been nine years.

“This won’t be resolved overnight,” Trennert says.

Financial repression

Trennert also echoed the comments of bond king Bill Gross from earlier this year that the country continues to face financial repression, with low interest rates making it hard for consumers to find a safe haven for their assets. See: Bill Gross wows advisors at Morningstar conference, but not with good news.

Financial repression occurs when countries charge rock-bottom interest rates, forcing investors to choose safety in the form of negative interest rates or a move to riskier products.

Don Rissmiller: When we look at
debt downgrade, what we’re setting up
for is an environment where there
are drags on economy for quite
some time.

Turmoil to continue

The markets will continue to be unsettled as the country struggles to deal with its steep debt, Rissmiller added. This will be an issue for the United States to address for years to come.

“When we look at debt downgrade, what we’re setting up for is an environment where there are drags on economy for quite some time [leading to] slower trend growth,” he says.

Laying blame

The economic leaders pulled no punches when speculating on the cause of the current crisis. “We are faced with uncertainty about the face of economic recession,” Thomas said. “Markets react violently when there’s uncertainty. I think there’s a lack of leadership in Washington and that’s been exhibited by Congress and the administration.”

Future calls

Envestnet’s Wednesday conference call arose from advisor demand, Crager says, and the company intends to schedule more of them under the name “Envestnet’s Marketing Morning,” moderated by Crager and featuring leading investment strategists and thinkers.

Next week’s call will feature economist Zachary Karabell, president of RiverTwice Research and a columnist with Time magazine and The Daily Beast. He was named by the World Economic Forum as a “Global Leader for Tomorrow.”