RIA confidence in economy, stocks declines in May

Thomas Coyle

29 May 2007

Advisors ask whether the equity market's recent run is running out of steam. RIA confidence in the U.S. economy and stock market fell back in May, according to the latest Advisor Confidence Index . Excessive exuberance on the part of investors, a sense that the U.S. consumer is under pressure from rising energy prices and the possibility of slowing corporate earnings growth are some of the factors investment advisors site.

"The financial markets are getting more risky as spreads between safe and risky assets continue to narrow," says Bill Ramsay of Raleigh, N.C.-based Financial Symmetry. "Apparently too many investors believe that high risk equals high return."

Advisorbenchmarking's ACI, which is based on a monthly survey of 150 independent RIAs, fell 3.93% in May to 111.55 from 116.11 in April.

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The ACI goes from a "very negative" 33.33 to a "very positive" 166.67; its mid point, 100, represents a neutral outlook on the stock market and the economy. The ACI has been in existence since April 2004. It hit an all-time high of 121.41 in December 2005 and an all-time low of 106.07 in June 2006.

Each of the ACI's four components fell back in May. Advisors' current assessment of the U.S. economy declined by 3.96%; their view of the economy six months out fell by 5.03%, and their assessment of the economy a year ahead slipped by 0.44%. RIAs' consensus view on the stock market's performance six months out declined by 6.14%.

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The Conference Board's Consumer Confidence Index retreated to 104.0 in April from 108.2 in March.

When, not if

Advisors' comments varied widely in April. In May there is a more prevalent sense that the stock market is in for a decline -- though there's disagreement about the size of the correction.

"As we enter the middle of the year, I expect a slowdown in stock market activity," says Noel Swain of Spartanburg, S.C.-based ProVest Wealth Advisors. "I expect it to pick back up in late September or early October and finish well."

Terrence Beaton of Beaton Management Company in Haverhill, Mass., agrees that the stock market -- which he says is being buoyed by private-equity buying and "increasing earnings from weakness in the greenback" -- is due for a correction. "But investors don't want to sell as long as the market continues to go up."

Robert Isbitts of Weston, Fla.-based Emerald Asset Advisors says that many stocks are rising in price because they're viewed as takeover targets. "That's not investing, it's gambling," he adds. "The other gamble is the one market participants are taking on the US consumer. Energy, food, housing -- all are segments of the economy that are putting all but the wealthiest consumers in a disadvantaged position." If combined with tighter monetary policy "layers of consumer debt gradually unravel, and stock prices will fall hard."

But Pat Raskob of Tucson, Ariz.-based Raskob Kambourian Financial says that "clients are feeling comfortable that things are going well, with inflation somewhat under control -- except for gas prices -- and busy planning vacations and trips for the summer." Spending, he concludes, "will more than likely be good for at least the next quarter."

Advisorbenchmarking is an affiliate of Rydex Investments. -FWR

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