August 31, 2010

Rydex|SGI Advisor Confidence Falls to 16-Month Low; Consumer Confidence Improves

Four confidence indexes released in two days feature worries about unemployment

Four confidence indexes released in just two days signal a bumpy ride for the U.S. economy--and unemployment is the primary driver of market uncertainty on the road to recovery.

Among financial advisors, confidence in the economy and the stock market continued to lose traction in August, sinking to its lowest level in the last 16 months, according to a Rydex|SGI AdvisorBenchmarking survey released Monday, August 30. The Advisor Confidence Index (ACI), a benchmark that gauges advisor views on the U.S. economy and stock market, posted at 93.80 in August, down approximately 9% from 103.12 in July.

But the Conference Board's consumer confidence index, released Tuesday, August 31, improved moderately in August after declining in July. The index now stands at 53.5, up from 51.0 in July and 52.9 in June. The present situation index decreased to 24.9 from 26.4. The expectations index increased to 72.5 from 67.5 last month.

Either way, concerns about the lackluster U.S. jobs market depressed both the advisor and Conference Board indexes.

"Consumer confidence posted a modest gain in August, the result of an improvement in consumers' short-term outlook. Consumers' assessment of current conditions, however, was less favorable as employment concerns continue to weigh heavily on consumers' attitudes," said Lynn Franco, director of The Conference Board Consumer Research Center, in a statement. "Expectations about future business and labor market conditions have brightened somewhat, but overall, consumers remain apprehensive about the future. "

Advisor confidence, which declined in July, decreased more dramatically in August as advisors' outlook for the U.S. economy grows increasingly pessimistic--largely reflecting fears about the weak job market, said Maya Ivanova, a market research manager with Rydex|SGI AdvisorBenchmarking and Investment Advisor's monthly Practice Edge columnist.

"The number in negative territory was not surprising, but we have seen that even though advisors are pessimistic on the current, six-month, and one-year outlooks, they are neutral in their stock market outlook. The main reason for the negativity is that advisors are really worried about the job market and unemployment and housing numbers. And consumer confidence remains weak," Ivanova said.

Meanwhile, two other indexes also showed a drop in confidence.

State Street Global Markets' investor index for August 2010, released August 31, showed global investor confidence falling 4.4 points from July's revised reading of 96.5

to 92.1. Confidence decreased in North America, dropping 5.7 points to 95.3 from July's revised reading of 101. Confidence also decreased among European investors, dropping 1.2 points from 99.9 to 98.7, and Asia followed suit with confidence ticking down 1.6 points from 103.8 to 102.2.

And the Discover Small Business Watch released August 30 showed that small business owners' confidence in the economy soured significantly from July to August, with the largest one-month decline since November 2009, plummeting to 73 from 83.

A neutral stock market outlook was a bright spot in the otherwise gloomy advisors survey, according to Ivanova. Three out of four measures of the ACI decreased in August, with the current economic outlook down 12.9% from July, the 12-month outlook down 12.0%, and the six-month outlook down 11.68%. The stock market outlook, on the other hand, rose 0.44%.

In August, Rydex|SGI also surveyed advisors about their changes in asset allocations.

About one-third, or 32%, of advisors surveyed increased allocations to emerging market equities and cash. Almost one-fourth, or 23%, increased allocation to non-U.S. developed market equities. In addition, 30% of advisors decreased their allocation to the U.S. large-cap growth asset class, and 16% increased allocations to high-yield bonds.

"The economy will continue to sputter until we begin to see meaningful job growth," said George Cheatham, owner of American Financial Consultants Inc. in Louisville, in the Rydex|SGI release. "Unfortunately, that is unlikely to happen until we see a consistent increase in demand for products and services."

The monthly survey, now in its sixth year, is conducted via email with 150 RIAs. August's findings were also in line with Schwab's latest semiannual survey, in which nearly half of advisors said their clients are less optimistic about the market and economy than they were a year ago, Ivanova said.

Read August's Practice Edge, "The Lessons Advisors Learned During the Market Crisis," from the archives of InvestmentAdvisor.com.

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