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February 6, 2018

The bull is running out of steam and memories of 2008 will be playing on investors’ minds

By GlobalData Financial Services

The Dow Jones recorded its largest one-day point drop in history yesterday, leaving investors spooked.

Wealth managers must reach out to their clients now to avoid rushed decision-making and increased customer churn.

The Dow’s 4.6 percent decline was sparked by investor fears the US Federal Reserve would raise interest rates faster than anticipated after wage growth was revealed to be stronger than expected in Friday’s jobs report. The US 10-year bond yield was also trading at a four-year high yesterday.

The CBOE Volatility Index — a measure of investor uncertainty — has jumped 115.6 in 24 hours and markets are set to remain unsettled.

However, long-term prognoses vary — many have judged this sudden downturn to be a correction rather than a crash.

Going forward market observers will be watching new Fed chair Jerome Powell and the monetary pendulum closely.

Even with rising yields, corporate profits could remain stable, supporting equity growth alongside a strengthening US economy during the course of 2018.

Yet, a faster than expected tightening circle is likely to put an end to the bull market.

This means it’s time for wealth managers to reach out to their clients, as memories of the 2008 crash will be playing on investors’ minds and could trigger rushed decision making.

With the return of uncertainty, clients need to feel assured that their wealth managers are monitoring the situation closely and taking the time to communicate with them.

The financial crisis caused a lot of avoidable client churn in addition to the savaged portfolio values.

So far, wealth managers haven’t been doing a good job of educating clients about impending interest rate hikes and the effects on their portfolios.

Interest rates started rising in the US in 2015, but data on drivers for cash allocation from a recent GlobalData survey shows that clients remained largely unprepared until the Fed stepped up its pace in 2017.

It was only in 2017 – two years after rates started to increase – that an expectation of higher rates and returns was cited as a significant driver for cash allocations: 41 percent of cash assets were invested with this in mind, as opposed to just 1.6 percent in 2016.

With central banks in key markets such as Canada, the UK, and the Eurozone having put the normalisation of ultra-loose monetary policy on their agendas for 2018, wealth managers need to take a more proactive approach to client education.

Preparing clients for potential downward volatility will ensure they don’t jump ship if markets turn sour, and that requires wealth managers to think long and hard about their communication strategies.