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April 07, 2010 at 08:00 PM
What a difference a year makes. This time last year (March 9, 2009 to be exact), we were in a state of high anxiety–concerned about unemployment, the stability of the banking system, a lack of confidence in the government and financial institutions, and the implosion of the stock market. More than one-third of advisors surveyed back then said that it would take investors more than six years to recoup portfolio losses, according to the Advisor Confidence Index (ACI) survey in March 2009. But a year later, we’re seeing a different picture. While some of the same fundamental issues are still at play, the investing community is much more confident about 2010 being a favorable year, with consensus among many leading economists that the world is in the midst of a sustainable economic recovery. According to the Rydex|SGI Advisor Confidence Index–an indicator that reflects advisor sentiment on the markets and economy–financial professionals are cautiously optimistic about the stock markets and the economy.
Advisors Taking the Market’s Temperature
Created in 2004 to give advisors a better insight into how their market opinions compared to their peers, the ACI puts advisors “in the know” regarding their counterparts’ economic opinions, according to participating advisors. Having a sense of their peers’ opinions on the market helps advisors recognize if their own outlooks differ greatly or are aligned with those of other advisors–and helps hone their own expectations.
Partially modeled after the Consumer Confidence Index, the ACI captures the sentiments of 150 independent registered investment advisors (RIAs) who complete a monthly survey about their outlook on the economy for various time periods. Each month, participating advisors answer four multiple-choice questions, reflecting their views on the current, six-month, and 12-month economic outlook, as well as the current stock market. The resulting answers are then encapsulated into a single index number.
If you look at the last 14 months of ACI history and compare it to the stock market (as shown by the S&P 500 in the chart below), you see that advisors’ sentiment usually trended with market performance. However, their outlook never plummeted as far as the market did in late 2009–the correlation coefficient between the ACI and S&P 500 was only 0.2. Perhaps no one wanted to believe things were as bad as they were, or perhaps advisors felt that the market would eventually return to more normal levels.
Because the stock market and economic outlook can differ substantially, the ACI tracks both to give an even clearer picture of advisors’ opinions. As Ken Graves of Capital Research Advisors in Alpharetta, Georgia, says, “Even though a relationship between the economy and the stock market exists, an assessment of economic and stock market forecasts are not the same. They are not Siamese twins. They are more like second cousins–related, but loosely.” This separation is clear when you look at the ACI economic and stock market outlooks separately (as in the chart below). Advisors’ economic outlooks dropped substantially at the beginning of the market crisis in the fall of 2008, even though their stock market outlooks were not as dire. The economic outlook has rebounded substantially from the lows of last summer, although it still trails the stock market outlook, even this year–likely pointing to some of the underlying economic issues that advisors are still concerned about, including unemployment and the budget deficit.
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