Juggling Dynamite

The most recent SEI Advisor Network survey reports that financial advisor optimism is at euphoric levels, with 96% either optimistic or excited about the year ahead.  85% say that they expect investment markets to be as good or better in 2015 than they have been in 2014.

See:  Advisors break out Champagne:  are bullish on 2015

Their much abused clients–not feeling quite so chipper:

“…the survey indicates that clients do not mirror their advisors’ level of enthusiasm. Nearly a quarter of advisors surveyed said their clients were generally more pessimistic and reactionary to market events than they were in 2013.

Perhaps that wall of worry is harder for ordinary investors to climb than advisors whose primary incomes derive from the ascent.

Indeed, in line with rising market expectations, advisors surveyed expected their own businesses to expand in 2015, with 72% expecting growth over 5% and a third of advisors anticipating very large expansion in the 10 to 15% range.

But handling that growth aroused greater anxiety among the otherwise upbeat group of respondents, with close to 40% identifying finding the right client as their biggest challenge.”

Good to see that the advising community remains most worried about growing their own fees and not silly things like how to protect their clients from life-changing capital losses… Of course, they do have a perfect record of being supremely bullish when assets are perilously over-priced and hopelessly bearish after prices have retraced to the most attractive levels.

And as shown in the following chart, broad market stock valuations have only been less attractive and more perilous for holders once before in human history, and that was for a brief period in 2000 as the tech bubble collapsed.  Yup, capital risk is higher today than just before the Great Crash of 1929.  No wonder advisors are feeling so giddy!

“One of the biggest American myths is limitlessness. You’d think by now we’d understand our own limitations but the American myth – and you can hear it on Rush Limbaugh every day – is one where the horizon goes on forever and more growth is always possible and any failure from Vietnam to the 2008 crash that we’ve ever had is just a case of failing to fully exert our exceptional American qualities.

Writer Paul Roberts, sees that myth, being wired up to a dangerous culture of impulse gratification where Amazon knows what kind of shower head you want – before you do and will send a drone to drop it on your doorstep before the words of your wish come out of your mouth.”

Here is a link to an audio clip of Roberts in conversation with Colin McEnroe talking about some of the material in his new book, The Impulse Society:  America in the age of instant gratification.

Points of reference to ponder:  the energy (21.6% weight) and finance (36% weight) sectors account for a combined 57% of the broad market TSX composite today.  Even with significant declines since June, the energy sector index still has a further 24%, and the financial sector index some 67% (which includes 90% of income trusts/REITS), of downside before returning to their 2009 cycle lows (see top lines on far right of chart below).  If you think that seems impossible, then you don’t appreciate the range bound dynamics that create market cycles within secular bears.

Having these 2 dominant sectors recouple with other key economic sectors that have already retraced near their 2009 lows, would knock the broad market TSX 29% lower –so from current 14000 to the 9900 range.  And that’s without any commensurate declines in other so called ‘conservative’ sectors like health care, utilities, consumer discretionary, telecom etc.  When likely weakness in these other areas is added, a retest of the 8000 area becomes quite plausible for the TSX before this full cycle completes.

A similar magnitude decline for the correlated S&P 500 also makes cyclical sense–so greater than a 50% decline from present levels.  Sectors and broad markets often lag one another, but historically ‘decoupling’ is a finance myth.