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.
Anything else?
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.
