Help clients understand bad market news

This article was originally published in April 2012.

If your clients are constantly fretting over dire market headlines, it’s time for them to stop.

Despite looming global threats and reports of disappointing economic data, investors need to focus on the real drivers of the economy, such as the consumer.

“Market reports aren’t always worth the paper they’re printed on. Though they certainly have value, you have to look at year-over-year averages rather than month-to-month results,” said Robert Johnson, director of economic analysis for Morningstar, speaking at the third annual Exchange Traded Forum. “[Based on reports], the U.S. recovery looks uneven. Over the long term, however, growth is steadier than it seems.”

He added, “Anything from weather to politics can affect the market on any given day, and you also have phenomena like the Tsumani that impacted auto markets last year and the Arab Spring. You have to look at every factor and its full effect to evaluate the economy and its recovery.”

Today’s U.S. GDP data provides a case in point: The U.S. economy seems to be struggling since growth slowed to 2.2% in the first quarter, down from 3% in the last quarter of 2011. If you look at last year overall, however, growth only expanded by 1.7%. On a year-over-year basis, the economy has improved substantially.

Investors and professionals shouldn’t be overly worried about macroeconomic problems, such as falling Chinese exports or Europe’s sovereign debt crisis, he says. These issues are old news and for the most part, have been priced into the market and dealt with.

Read: Taking advantage of the fear premium

Investors and advisors should instead look at factors like consumer spending and inflation. While rising gas prices have impacted the U.S. economy, people continued to spend at a growing pace, with the auto industry improving and housing inching back. They are also spending 3% less on mortgages and credit.

In his view, consumer sentiment and spending is key to the growth of most countries, since it drives “the cycle of demand and growth. Spending spurs manufacturing, which in turn creates jobs, opportunities and more spending.” In the U.S. alone, consumers account for 70% of economic activity.

Johnson urges advisors and professionals to speak with experts and do their research to determine actual market sentiment, and how best to invest their clients’ money. If you don’t consider sources and data logically, they could have you “thinking another recession is around the corner. Avoid internalizing survey results and the skew of numbers releases by economists.”

In relation to ETFs, Johnson says the funds can help clients adapt to the fluctuating market and also get exposure to emerging markets and untapped asset classes. Currently, many investors are still cautious about U.S. markets and bonds look risky.

“ETFs are a great alternative product that can diversify a portfolio and give exposure to new and frontier markets,” says Amelia Nedovich, head of business development, ETF and structured products, Toronto Stock Exchange. “Q1 saw the largest quarterly inflow ever for Canadian ETFs and assets are at a record high. There is still amazing potential for growth.”

As an advisor, you can help your clients gain knowledge of the risks and benefits of ETFs, which provide a low-cost alternative for investors looking for less risk and cheaper investment vehicles in order to face challenging markets.

The product list is growing rapidly, and an advisor needs to be able to help the client choose the proper vehicle for their needs from a field of more than 250.

“If a client came in and said they wanted to get exposure to oil, an advisor wouldn’t look for just any oil ETF,” says Chris McHaney, vice president and portfolio manager at BMO Asset Management, “They would, of course, find the most suitable product for their client.”