Advisors’ worst fears for 2023 turn out to be groundless so far

According to CoreData research, financial advisers remain generally bleak on financial markets this year, but are betting on a recovery in the tech sector.

A study from late last year shows that 54% of consultants consider the current economic situation to be the worst since the global financial crisis 15 years ago.

At least 40% of advisers expect market volatility to increase this year, and 50% believe the Federal Reserve will continue to raise interest rates above 5%, about 50 basis points above current rates.

The reality, at least during the first six weeks of the year, was not as bleak as financial professionals expected.

The S&P 500 index, which fell 18.2% in 2022, is up 6.8% this year. The bond market, represented by the iShares Core US Aggregate Bond ETF (AGG), has fallen 13% in 2022, its worst year ever. But the bond category is up 1.1% this year.

And the classic 60/40 portfolio represented by the Vanguard Wellington Fund (VWELX), which was down 14.3% last year, is up 2.3% since the start of 2023.

Compared to last year’s low market performance, 57% of advisors expect stocks to perform better this year.

The general skepticism about traditional asset allocation strategies makes alternative strategies attractive, mostly in an attempt to hedge the risk of loss. But if markets continue to move forward, some portfolios may feel the brunt of switching to alternatives too late.

With volatility expected to rise, 42% of advisors say they are protecting client portfolios but are having trouble implementing these strategies, and 45% say they are struggling to find safe-haven assets.

This raises questions about the suitability of a 60/40 portfolio, with 27% saying the model no longer works.

“In 2022, the 60/40 portfolio model could be forgotten for a year,” said Andrew Inwood, founder and CEO of CoreData. “We expect advisors to revisit strategies based on this traditional model as they look for more innovative portfolio diversification solutions ahead of what is likely to be another bumpy year.”

Meanwhile, the difficult situation on the market is pushing the adviser to active managers. Nearly four out of ten (38%) say they will increase client contributions to active funds over the next 12 months. A minority (27%) plans to increase deductions to passive funds.

When it comes to relying on technology, this strategy has worked so far.

The iShares Exponential Technologies (XT) ETF, which lost 27.8% last year, is up 12.1% this year.

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