Why advisor would welcome 20% correction

There is nothing to suggest the end of this bull market other than its duration and investor emotion, according to one advisor.

Sean Harrell, partner and senior advisor at Howe, Harrell & Associates, said he would welcome a 20% correction, which would allow him to put more of his clients’ cash to work.

He said: “We have some money sitting on the sidelines with clients who are a little bit afraid that the markets are too high or expensive right now.

“We’ve got portfolios fairly conservative and they’ve had decent returns. They did 7-8% last year and it’s way below a balanced mandate. [A 20% correction] is just what we’ve been telling our clients; it would fit our story and fit our pitch. And then we could deploy our clients’ money back into their appropriate risk tolerance once we’ve figured the markets are not so expensive.”

Harrell said he works with a couple of portfolio managers with high cash holdings who are looking for opportunities but are selective.

He said: “They are deep, deep value managers so they want to buy stuff at a massive discount. They are true to their form. They won’t spend the money on something that doesn’t fit their bill, so we have some money tied up with them, and we’d like to see them deploy it.”

The Winnipeg-based advisor said a 20% correction would not have to be across the board as his firm assesses sectors individually. He has already deployed some money into energy sectors he thinks are “still depressed”, investing in large companies that have been acquiring.  

In terms of the stock market, Harrell believes the swagger of overconfident investors is more of an issue than economic fundamentals, which are currently encouraging.

He said: “People are getting arrogant, almost to the point where they think they should make this money every year for 10 years straight and they haven’t been through something like 2007 or 2008. Markets can react emotionally too – they don’t always have to be quantified by numbers.”

He added: “We’ve definitely scaled back the risk for clients who are approaching retirement or who are in retirement, thinking that a market correction is going to come up and we’ll diversify their portfolios again. So we play it pretty safe.

“If you’d have asked me [early] last year I would have said 2017 was the time for a correction – so I got that one wrong already. It keeps going. There are a lot of good fundamentals. A lot of the companies have had tax cuts in the States, which is going to free up a lot of cash flow that they were paying taxes on before. Small business tax is going down in Canada as well so, realistically, small businesses should have more cash to invest as well.

“I don’t see anything glaring that is going to push us off trail except the fact this is a 10-year bull market.”