Chill economic winds ahead, advisers say

Sep 4, 2011 @ 12:01 am

By Dan Jamieson

Financial advisers, normally an optimistic lot, are growing increasingly gloomy about the economy.

Negative headlines — ranging from the embarrassing debt ceiling debate and the U.S. credit rating downgrade to the wobbly economy and a volatile stock market — have taken a toll on adviser sentiment.

One measure, the Rydex SGI Adviser Confidence Index, fell in August to its lowest point in the past 12 months. The monthly survey captures the mood of 150 independent registered investment advisers.

Advisers are especially grim about the economy, according to the survey results. Fear of another recession helped push the “current economic outlook” component of the index down 12 percentage points from the previous month, Rydex SGI said.

“You can flip a coin as to whether we are in another recession right now,” said Bill Ramsay, president of Financial Symmetry Inc., which manages $120 million. Gross domestic product growth in the first half was less than 1%, he noted.

Mr. Ramsay thinks that it will be two to four years before the United States sees a solid recovery, which will have to be driven by a rebound in housing construction.

The latest GDP revisions indicate continued tough sledding.

In late July, a sharp revision downward of first-quarter and earlier GDP data set back the recovery by three quarters, said Ward McCarthy, chief financial economist at Jefferies & Co. Inc.

Add in the credit downgrade and the August market collapse, and confidence is shot, he said.

“We know from history that a decline of confidence causes deceleration in economic activity,” Mr. McCarthy said. “Now we're waiting to see the magnitude.”

The latest Conference Board Consumer Confidence Index plummeted to 44.5, from 59.2 in July. That index is now at its lowest level since April 2009.

“Gold is a proxy for consumer sentiment, and look what it's been doing,” said Michael Dubis, founder of Michael A. Dubis Financial Planning LLC.

Sentiment among economists isn't any better. A survey of economic forecasters by The Associated Press in August put the odds of another recession at 26%, up from 15% in June.

To top off the bad news, Pacific Investment Management Co. LLC founder Bill Gross told the Financial Times recently that Pimco's “new normal” thesis, which predicts a prolonged slow-growth period, might have to be renamed “new normal minus.”

Will Hepburn, founder of Hepburn Capital Management LLC, which manages $32 million, thinks that most advisers still are overly rosy with their outlooks.

The United States is in a full deflationary spiral caused by a credit contraction, similar to the period from 1929 to 1948, he said.

“I don't think most advisers grasp how deflation works,” Mr. Hepburn said. “They dismiss its importance and the pernicious effects it has on industry and, therefore, investments.”

Other advisers, though, aren't quite that negative.

“I don't think it's as bad as some parties make it sound,” Mr. Dubis said.

No matter where they stand on the issue, advisers are seeing clients affected by the anemic recovery.

“Some clients, from doctors to small-business owners, are feeling the pinch,” Mr. Dubis said. “Most of my clients have anxiety about the economy, for sure.”

At the same time, clients' investment expectations have come down, said Christopher Lamb, a principal of Old Mission Investment Co. LLC, which manages $340 million.

“They're more comfortable with a 6% or 7% balanced portfolio” that meets their needs, rather than worry about how they do relative to the market, said Mr. Lamb, who also thinks that conditions aren't as bad as media reports make out.

Still, with a rebound rally under way, some investors “feel that this is a significant opportunity to lighten up, given what happened in 2007 and 2008,” he said.

“If I talk to them about raising cash, they're not fighting,” Mr. Lamb said.

Email Dan Jamieson at djamieson@investmentnews.com

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