Predicting the market is a highly sought after skill. Knowing where the market is headed and being able to adjust portfolios for future movements is a valuable talent indeed. And while most people might argue that it’s near impossible, they would underestimate investment advisors’ sixth sense of the market’s direction.
For the past three years, via our Advisor Confidence Index, we’ve asked advisors for their thoughts on the economy and stock market. To celebrate the index’s three-year anniversary, we took a look at how it has compared to the stock market’s movements during that time period and discovered that advisors have correctly predicted future market movement trends about 80% of the time.
Originally created to give advisors better insight into how their market opinions compare to their peers, the Advisor Confidence Index showcases advisor sentiment on the market and the economy. All the advisors who participate in the Advisor Confidence Index rank the index as either being “very useful” or “useful,” with most (85%) saying that it puts them “in the know” regarding their counterparts’ economic opinions. Partially modeled after the Consumer Confidence Index, it captures the sentiments of 150 independent registered investment advisors (RIAs) who participate in a monthly survey about their outlook on the economy for various time periods. Participating advisors answer four multiple-choice questions, reflecting their views on the current, six-month and 12-month economic outlook and current stock market outlook-the resulting answers are then capsulated into a single index number. The change in the index’s value from the preceding month is then calculated and reported as a percent change. For instance, advisor confidence bounced back in April to 116.11 after hitting a record low in March and then decreased again to 111.55 in May.
To gauge advisors’ success rate in the stock market, we plotted their six-month economic outlooks (shifted out six months) against the S&P 500. As the chart below shows, the six-month outlook (ACI-6) shares the same pattern as the S&P 500 Index. In short, advisors’ financial outlooks were correct most of the time when looking ahead at how the stock market might perform over the next six-month interval.
Bigger Firms Less Optimistic
Interestingly enough, it seems that among the representative sample of 150 firm principals that make up the Advisor Confidence Index one trend persisted-the bigger the firm, the less optimistic their outlook. As the chart below shows, firms managing less than $100 million in assets had on average an index value of 121.98, firms with assets between $100 and $399 million had a value of 114.25 and firms managing over $400 million had the lowest value of all-107.63. We believe that bigger firms with more seasoned principals tend to be more cautious in their investment and economic assessments than smaller, younger firms.
But the burning question on everyone’s minds remains-what do advisors see in the next six months? The latest index results indicate a more downbeat market-advisors have a cautious assessment of future trends in the stock markets. “The financial markets are getting more risky as spreads between safe and risky assets continue to narrow,” according to a survey participant. Also, advisors are concerned that retail consumers cannot continue to carry the market, while they are keeping an eye on probable slowing corporate earnings growth with concurrent Fed policy decisions, inflation and normal seasonal market adjustments. Will they be right? Only time will tell.
Maya Ivanova is a research manager with Rydex AdvisorBenchmarking.com, an affiliate of Rydex Investments. She can be reached at firstname.lastname@example.org. The 2007 Rydex AdvisorBenchmarking survey is now open. All advisors who take the 2007 survey will receive a $5 Starbucks certificate. Visit www.advisorbenchmarking.com to see how your firm stacks up to the rest of the industry by viewing dynamic charts that instantly show you industry comparisons versus your firm’s data.