With inflation spiking, interest rates hiking, and recession fears striking, wealth managers in and around Los Angeles are wondering whether they’re in for a 2000, a 2008 or a 2020 investing environment.
But when it comes to the possibility of a bear market, California’s seen grizzlier; most experts seem confident the answer will be “none of the above.” Though the short-term investing future might share some similarities to crises past, experts say they’ve learned from those downturns – and so have their clients.
“Our clients have been handling it very well – they’ve lived through 2020 and 2008, so they’re used to cycles like this,” said Brad M. Larsen, managing director and market executive for Bank of America Private Bank.
Larsen said his team read the tea leaves and diversified their portfolios with the expectation of a downturn, helping their clients avoid the brunt of the impact. While some clients have partially cashed out, Larsen said the lessons of the Covid-prompted nosedive of 2020 are still fresh on consumers’ minds.
“Nineteen months (after the March 2020 downturn), the S&P 500 was up 100% from where it was,” Larsen said. “So, we are down from there, but some people, when they take a step back, notice we’re still above the levels we were at when we went into the pandemic.”
A major motivator for that crash was that no one really knew what was happening, Larsen said. People didn’t know how long businesses would be closed, how many people would die, or whether a quick turnaround on a vaccine was feasible, to name a few unknowns.
Michelle Nguyen, managing director of the Wilshire-based wealth management firm First Foundation, said there’s a lot less uncertainty this time around.
“There’s so much negative news and sentiment right now, with the word recession coming into play every day,” Nguyen said. Clients “certainly have heightened awareness within the market, but for the most part, they’ve remained calm and realized this is, if anything, a very unique buying opportunity.”
Nguyen said most California-based clients (and clients nationally) have been bracing for tougher economic times, thanks to a mix of personal experience and coaching on their wealth managers’ part.
“We’ve trained them to be committed to those long-term opportunities. It stings, but my phone’s not ringing off the hook (with concerned clients),” Nguyen said. “We remain bullish; as long as things are turning around within a year, we don’t think the Fed’s going to get to that 3.5% target interest rate, and all the turmoil and volatility that would come with it.”
Nguyen said most industries in and around Los Angeles have remained in healthy shape despite recent financial woes, highlighting in particular the continued activity among her merger and acquisition clients.
“We’ve got layoffs left and right among public companies, but there’s still so much activity and growth among private companies,” Nguyen said.
Greg Kushner, founder and chairman of Century City-based Lido Advisors said his clients have been keeping similarly cool and collected, as most of the phone calls he’s received about the downturn have been seeking opinions about when to get more aggressive with their investing.
“That’s a good sign that we should not only expect things to go up, but that it’s going to go up faster than people are expecting,” said Kushner. “This doesn’t feel like a 2008 to me, which was all about employment. As an employer, I can tell you that we have a lot of job openings right now, and we’re a firm that’s growing year after year.”
Oil and gas pumps, tech dumps
Dean Kim, the head of equity research for the Playa Vista-based William O’Neil + Co., said the slate of bad news has put certain Los Angeles area industries under pressure, even if hedge funds and retail investors with long positions are weathering the storm admirably.
“The only sector holding up well right now is energy – the big oil and gas companies, essentially,” Kim said.
That’s been to the benefit of certain California-based energy corporations, including the San Ramon-based Chevron Corp., which as of last week had seen its stock rise nearly 30% over the previous six months to more than $148 a share. But with the states’ intentional move away from the oil and gas sector, Kim said California isn’t seeing the full benefit.
At the same time, Kim said the green energy and tech start-ups embraced by Los Angeles County and the state at large are being hit hard. The electric vehicle automaker Fisker Inc. fell to about $8.50 a share last week, a decrease of nearly 50% from Jan. 1.
The Culver City-based fintech startup Albert laid off about 20 employees in June, nearly a tenth of its total staff, according to dot.LA, a tech news site.
Santa Monica-based sports media startup Wave Sports + Entertainment laid off 56 employees – roughly one-third of its staff – according to a report by Business Insider.
“As the industry begins to face economic headwinds, this restructuring will also allow WSE to maintain its strong balance sheet position, continue aggressively investing in key growth areas and manage from a position of strength,” a spokesperson for WSE said.
Speaking generally, Larsen said many tech companies have done well over the last five years, despite having little-to-no earnings, buoyed by low-interest rates and low inflation.
“There was a lot of easy money,” said Larsen. “I think folks did really well in those types of companies, but there will be a shift to quality emergences, particularly when we’re going to have high inflation for a while.”
Kim said a reversal on that trend – or at least, a peak for the oil and gas sector – could serve as the signal investors need to start pouring cash back into the market.
“We think the market is going to continue to be in this downtrend for quite a while, so I don’t think we’re seeing the bottom yet,” said Kim. “Once you see the oil and gas sector deteriorate, that’s probably the first sign of the bottom.”
And how quickly recovery comes after that will depend, literally and figuratively, on how much gas investors have in the tank, according to Spuds Powell, managing director of the Century City.-based Kayne Anderson Rudnick Wealth Advisors.
“People are frightened, they’re worried and discouraged and they’re unhappy with the way their investments are performing, thanks to the sell-off in both the stock and bond market. I don’t think many people realize that as poorly as stocks have done, bonds have done worse,” Powell said.
Despite the doom and gloom, Powell said there’s a lot to be optimistic about in the current market that could steer the economy away from a recession, or at least make it a minor one. A strong job market, rising wages and home values are meaningful signs of a healthy economy, he said, vital signs that were typically lacking in previous downturns.
“I think a lot of people underestimate the strength of the U.S. consumer. We’ve seen high inflation for about a year now, and despite that… businesses have been growing and profiting, and consumer spending has been rising,” Powell said. “That’s because, thankfully, the consumer is in a very healthy position.”
Confident that the market is closer to the bottom than the top, Powell advised investors against pulling out and trying to time things from here, a sentiment echoed by Larsen, Nguyen, and, to a slightly more wary extent, Kim.
“Some investors may want to use a bounce to trim their positions, maybe in some of the sectors that will take longer to recover. That’s the best thing they can do for the moment,” Kim said. “I don’t see (wealth managers) gaining many new clients at the moment – when things are going down, people tend to stay away from the market. I think their biggest job right now is to keep people calm and let them know when it’s clear.”