Last month, JPMorgan CEO Jamie Dimon said he considered himself “far more worried” about a significant stock market correction than his Wall Street colleagues. If markets were pricing in a one-in-ten probability of a correction, he’d peg it closer to one in three, he told the BBC.

The others are catching up, however. Goldman Sachs CEO David Solomon and Morgan Stanley CEO Ted Pick issued their own warnings of an equities drawdown on Tuesday at a summit in Hong Kong, which were enough to ignite valuation fears 8,000 miles away in New York.

Listen Up

You know why many believe there is a market bubble. The S&P 500 keeps setting record high after record high, and the index’s forward price-to-earnings ratio of 23.2 is well above its 10-year average of 18.6. Inflation remains elevated. Interest rates remain elevated. The ongoing US federal government shutdown is poised to become the longest ever today.

In recent weeks, however, markets have mostly shrugged off pronouncements from the International Monetary Fund, Fed Chairman Jerome Powell and Bank of England Governor Andrew Bailey that markets are frothy. Same with outgoing Berkshire Hathaway CEO Warren Buffett’s cautious moves from his Midwest perch in Omaha. But after Solomon told the Global Financial Leaders’ Investment Summit on Tuesday that “it’s likely there’ll be a 10% to 20% drawdown in equity markets in the next 12 to 24 months” and Pick agreed, adding he anticipates a 10% to 15% drawdown, investors seemed to take their forecasts to heart:

• The S&P 500 fell 1.2% Tuesday, and the tech-heavy Nasdaq Composite, which offers a better window into highly valued tech and artificial intelligence stocks, fell 2%.
• Tech giant Oracle and chipmaker AMD each fell 3.7%, Nvidia dropped 4%, Tesla tumbled 5.1% and Amazon declined 1.8%. Crucially, there were signs that the selloff was not a reflection of earnings but rather of broader valuation concerns in AI and tech. For example, software-maker Palantir slid 8% despite handily beating estimates and hiking its full-year guidance a day before.

The upside is that Solomon and Pick believe the drawdown will be relatively healthy, not crisis-level. “It’s not something that changes your fundamental, your structural belief as to how you want to allocate capital,” Solomon said. Pick added that the “possibility of drawdowns … that are not driven by some sort of macro cliff effect” is “welcome.”

Taking Private Credit: Equities aren’t the only assets that may be in line for a correction, attendees at the summit were told. UBS Chairman Colm Kelleher became the latest to express concern about the US insurance industry, which has made significant portfolio allocations to private credit. He said the industry is creating a “looming systemic risk” and criticized its use of small credit ratings agencies that only provide their ratings to a limited number of investors.

Money market funds aren’t the most lucrative. So why do investors keep buying them?

The strategies continue to see massive inflows, with $20 billion flowing in last week alone, bringing total assets to about $7.4 trillion and heightening interest in money market ETFs, a small but growing adjacent niche. Issuers have been quick to hop on the bandwagon, with JPMorgan, Vanguard and Schwab all introducing their own money market ETFs, despite a lower interest-rate environment that can diminish returns for money market funds because of their focus on Treasury bills and municipal bonds. Continued interest in the products is a result of both relatively high yields despite the low rates as well as an uncertain macroeconomic environment, experts said.

“On a risk-adjusted basis, [money market funds are] still a good tradeoff because you’re getting a 4% yield with zero risk,” said Aniket Ullal, head of ETF Research at CFRA. “Over time, if rates keep falling, we should see a reversal in interest. But right now, the returns are high enough that it’s worth it for investors.”

Money Marks the Spot

Part of the interest stems from the relative safety the funds provide amid an ongoing trade war with China and other headwinds. The SEC’s current guidance on the funds, Rule 2a-7, dictates that their holdings consist of conservative investments, with an average maturity not exceeding 60 days. “They have to have a low average maturity; there’s liquidity requirements,” Ullal said. “All of those rules make money market funds a much safer investment.”

But the rule doesn’t apply to ETFs that invest in money market funds, so most of them don’t actually adhere to 2a-7. There are only five such ETFs that comply, according to Ullal, in part because of their relative newcomer status. “Issuers launching money market fund ETFs is a fairly recent phenomenon,” Ullal added. “Money market ETFs have over $5 billion in assets. That’s very small compared to what’s in traditional money market funds.”

According to the Investment Company Institute:

• Money market funds are appealing to both institutions and retail investors, who have $4.4 trillion and $3 trillion invested in the asset class, respectively.
• Government funds make up $6 trillion of the investments, while prime money market funds make up roughly $1 trillion.

Reversal of Fortunes. Ullal predicts interest in money markets will eventually reverse as interest rates continue to drop, particularly following an expected 25 basis-point cut in December. “Money market demand may stay strong into next year,” he added. “It’ll probably take a few more rate cuts for investors to slowly move out of them.”

Advisors may not have to worry about missing a paycheck during the government shutdown, but some of their clients do.

The shutdown affects millions of federal employees, who have either been furloughed or continue to work without pay, and the implications are drastic: Workers will miss upward of $21 billion in back pay if the closure continues into December. Advisors need to be aware of the unique planning needs of federal employees and what impact the missed income may have on their retirement savings. “This is creating a ton of uncertainty, and navigating this uncertainty can be very stressful for these individuals,” said Thom Hall, a managing director at Carson Wealth’s Murray, Utah location, who works directly with federal employees. “They will have to find ways to manage their cash flow with no pay.”

Basic Training

The main way advisors can address these workers’ needs is by helping them create a robust nest egg. A best practice is to treat the missed or delayed paycheck as an “income gap,” said Hall. Also, be prepared to forgo any further income until the government reopens. That means prioritizing essential expenses like housing, utilities, food and health insurance premiums, he added. There are also indirect sources of help for federal workers. “Non-monetary support through food banks, community assistance programs, health and mental health support to address the increase in stress from financial strain can all make a difference,” Hall said.

Depending on the government organization involved, some resources may be available to help. Members of Congress, Supreme Court justices and federal judges continue to receive paychecks, as well as about 830,000 federal workers whose compensation comes from spending packages.

Advisors of federal employees can also:

• Assist with accessing unemployment insurance, relief programs aimed at federal workers during the shutdown, state or local assistance programs and federal employee support organizations.
• Help track federal agencies’ human resources or Office of Personnel Management guidance page to monitor the status of clients’ pay or back pay.

AWOL Paychecks. Unfortunately, not even the military is safe. Active-duty military received Nov. 1 paychecks, but that doesn’t guarantee the next round. “A lot of military, for a long time, thought they were bulletproof as far as needing an emergency fund because they’re like, ‘The military always gets paid,’” said Joe Brown, a financial planner with the Military Financial Advisors Association specializing in active duty military personnel and veterans. “Well, [during] the last shutdown, the Coast Guard did not get paid for a couple of paychecks.”