AllianceBernstein Wealth Manager Talks Fiscal Cliff and Investing to NYU Journalists

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“We’re in the middle of a least loved bull-market right now, with investors gripped with fear.” – Shane Bigelow, director and principal, Bernstein Global Wealth Management

By: Teck Lim

Whether from negotiations between Democrats and Republicans in Washington, screaming doomsday headlines, or even commuters conversing on the subway, the national conversation seems to be focused on one key issue: The fiscal cliff.

Set to begin taking effect on January 1, 2013, the term refers to tax increases and government spending cuts of up to $500 billion, according to the Congressional Budget Office. Most Americans wouldn’t directly feel the effects of the federal cuts, but the tax hikes would increase taxes by an average of about $3,500 per household, according to the Tax Policy Center’s estimate.

While going off the cliff would mean shaving off $500 billion from the $16 trillion national debt in 2013, it would also mean unemployment rising to 9 percent and real GDP contracting about 3% in the first half of the year, which would tip the country into a recession, according to the Congressional Budget Office.

That’s if Washington cannot achieve bipartisanship by the end of this year.

“It’s probably at the forefront of every US investor’s mind at the moment,” said Shane Bigelow, director and principal of Bernstein Global Wealth Management, a subsidiary of AllianceBernstein. “There will most likely be changes to the specific terms, but the bigger question is what these changes will entail, and how they are going to affect the market.”

Speaking to a room of NYU journalism students last Monday at AllianceBerstein’s headquarters located uptown, Bigelow discussed how the research-driven global asset management firm, which manages over $400 billion in assets, assessed the current economic climate.

“We’re in the middle of a least loved bull-market right now, with investors gripped with fear,” he said, pointing to a graph that depicted a shift of roughly US$1 trillion of $16 trillion coming out of stocks into bonds this year. “History shows that that’s not the smartest way to invest your money.”

Flipping between graphs and charts of historical market sentiment during and after major financial crises like the 1980s savings and loans crisis, the dot-com bubble, and the more recent subprime mortgage crisis, Bigelow made the case that too many investors tend to pour their money into stocks at the peak of a bubble, and pull it out only after it crashes.

In other words, speculation drives investors to buy stocks when they are overpriced, while fear pushes them to sell when they are undervalued.

As if predicting the next wave of folly, Bigelow, staring intently into the audience, warned of a bubble in high yield dividend stocks.

“Investors are attracted to high dividend stocks because of the income they are able to generate in their portfolios,” he explained. “But because they are so attractive, especially in this low-yield environment, many of these stocks may be overpriced and as a result may underperform the market over time.”

Instead, Bigelow suggested that investors put their money in value stocks – stocks that are cheap in terms of their price-to-book ratio – in order to take advantage of dampened market sentiment, largely created by the fiscal cliff.

“Our goal at this firm isn’t to achieve spectacular returns, but instead, steady and consistent returns in the long run,” he said.

Explaining how path of return matters to the individual investor, Bigelow demonstrated the difference between account values that all had the same overall return of 10 percent over a certain number of years.

The account that maintained steady returns over the years had the highest value. This was followed by the account that experienced spectacular returns in the first few years, but then was hit by negative returns in the last few years. Finally, the account having the least value was the one which started off with negative returns, and ended with a few years of positive gains.

“At the end of the dot-com bubble, we might not have picked all the right stocks,” he said.  “But we were in stocks, and that already gave us a directional advantage, which is to some extent why we are where we are today.”

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