(New York)

Okay investors, hold on to your hats. A big name has just come down with a stern and gloomy warning for the markets. JP Morgan is saying that stocks may have a giant bear market. How big? Try a 40% correction, according to the bank’s co-president. Daniel Pinto, the bank’s co-president who oversees trading and investment banking, says that markets are bound for a big correction because of fears over rising interest rates and inflation. The bank thinks the market will see a two- to three-year downturn where prices will fall up to 40%.

FINSUM: This is a big correction that JP Morgan is calling for. We do think the market might go through a rough patch, but we don’t know if it is going to reach these kind of Financial Crisis era proportions.

(New York)

The market had a big sell-off this week when it was announced that top Trump economic adviser, and former Goldman Sachs executive Gary Cohn was leaving the White House. The departure elevated worries about a trade war and left investors feeling that there was no moderating voice left in Trump’s inner circle. However, the Wall Street Journal reminds investors not to be overly worried as this “Teflon” market seems to always shake off fears and heads higher.

FINSUM: The WSJ’s argument is not very strong, but trade war does seem like an issue where fear greatly outpaces reality.

(New York)

Over the last several months there has been a lot of doom and gloom about commercial real estate. Everyone had been expecting a surge in defaults in 2016 and 2017 given that many mortgages issued in 2006 and 2017 were coming due. However, the delinquency rate on commercial mortgages has been falling for 8 consecutive months and is currently at 4.51%, compared to 5.31% this time last year and 10.34% in 2012. Many borrowers have been able to readily refinance their debts given high liquidity in the market.

FINSUM: The market for commercial mortgages looks to be in much better shape than many feared.

(New York)

Morgan Stanley advisors look out, it appears the firm is sending a warning out to its wealth management force. According to Wealth Management, “Morgan Stanley in February filed a motion for a temporary restraining order and a preliminary injunction against a breakaway team in Farmington Hills, Mich. It was recently withdrawn. A lawyer for the breakaway team suggests that Morgan Stanley lawyers deliberately used the court filing, and prolonged the case, to make the conflict public and deter other breakaways”. One lawyer commenting on the moves says that Morgan Stanley is likely doing it to intimidate their current advisors into not jumping ship.

FINSUM: The end of the broker protocol made what was a tenuous environment into an all-out battlefield. This definitely seems like an intimidation tactic.

(New York)

The big question mark for advisors is whether they will need to keep cutting their fees in an effort to make themselves competitive with robo advisors. Bolstering additional services is another way to defend fees, but getting credit for these is difficult. Therefore, advisors might want to adopt an approach Ron Carson, from the Carson Group, uses. That method is to send clients not only an investment performance report, but also a “relationship timeline”, which shows all the services you have provided them, such “as the sale of a business or the analysis of expected Social Security benefits”, but could also including helping find mortgages, assisting with travel etc.

FINSUM: People are always very price-oriented and it becomes very easy for clients to forget just how much an advisor does. This seems like a good way to highlight it.

(New York)

Anniversaries offer an opportunity to gain perspective on the market. This week is no different. The S&P 500 just had its nine-year anniversary from its bottom of 666.79 in March 2009. Along the way there have been somewhere around 32 “panic attacks” according to analysts. But despite these, the market is now trading above 2,700.

FINSUM: So the real question is whether that 4x+ rise should make one nervous a new downturn is on the way, or comfortable that we are on an upward trend.

(Washington)

There is a currently a great deal of confusion surrounding the fiduciary rule, and understandably so. The rule is technically in force, but not fully, and there is even confusion over the interpretation of the rule and how it should be implied. With that in mind, lets clear up a few myths. The first and biggest myth is that the rule compels advisors to offer the lowest cost investment. It does not. It also does not mean advisors need to choose the “best” investment. While best interest is the rule, this does not mean advisors need to try to attain an impossible standard. Under the best interest contract, the three goals to meet under DOL rules are: “compensation paid to the broker-dealer and adviser is reasonable, recommendations must be in the best interest of the customer, and communications with the customer may not be misleading”. In terms of defining what “best interest” itself means, “’best interest’ requirement says that the recommendation must be prudent, take into account relevant information about the customer, and put the customer’s interests above those of the broker-dealer and the adviser”.

FINSUM: The confusion over the half-baked rule is very understandable, especially given the overall leadership vacuum surrounding its half-implementation.

(New York)

If ever there was a “5 stock” piece that investors might want to read, this is probably it. Barron’s has published an article naming five stocks which will do well as rates rise. Interestingly, these choices are not based on macroeconomics (e.g. REITS do poorly as rates rise), but based on the actual underlying financial obligations of the companies, with pension obligations being the key factor. The five names that come out when one looks at the situation that way are companies which investors will be very familiar with: GM, Ford, Xerox, American Airlines, and General Electric. The piece summarizes the benefits this way, saying “In general, as the health of pension plans improve, so should balance sheets, cash flows, and earnings due to lower pension contributions and costs”.

FINSUM: These look like very good calls because they are not obvious, but the benefits will be in time. Very interesting to see GE on there given its struggles lately.

(New York)

With rates looking likely to rise there are increasing concerns that the US housing market might be in for a rough patch. Rising rates mean more expensive mortgages, and combined with the lowering of the interest deduction threshold in the new tax package, real estate could be in for a rough ride. However, the opposite may be the case. The reality is there is low inventory and little new construction, leaving many buyers chasing a shortage of homes. Prices have risen steadily since the Crisis, but with the exception of a few coastal markets, have not surged, meaning pricing still looks reasonable. “Housing is in the third or fourth inning of a nine-inning game”, says one portfolio manager.

FINSUM: All the risk is in mortgage rates. If the Fed hikes very aggressively then it will hurt the market, but if things keep moving at this leisurely pace, housing will likely do just fine.

(New York)

Despite the rally, stocks are still down 5% from the January peak. But Invesco, it is down around 15%, which Barron’s argues presents a great buying opportunity. Invesco’s mutual fund business will earn less income if stocks fall, but unlike others, it may be a big beneficiary of the next bear market. Two reasons for this include Invesco having a strong balance sheet to make low-priced acquisitions when times are tough (as it did during the Crisis) and the fact that it has a great smart beta business, which should do well in tough times. The stock currently trades at a 44% discount to BlackRock on an earnings multiple basis, making the price attractive.

FINSUM: Invesco seems like it would be good to use in a pair trade in a down turn as its relative performance should be better than competitors.