RIA sentiment improves on bargain-basement stocks

Thomas Coyle

2 December 2008

Advisors slightly more optimistic on economic outlook and low equity prices. Investment advisors' confidence in the U.S. economy and stock market rose in November for the first time since August, according to Advisorbenchmarking's Advisor Confidence Index |image1| -- mainly on the view that securities have been beaten down enough to make a bargain-hunter's rally almost inevitable.

Coming off an all-time low of 79.07 in October, the ACI rose 4% to 82.46 in November -- still the RIA-sentiment's gauge's second-lowest monthly reading since its launch in early 2004.

On the back of a 12% run-up since 20 November, the S&P 500 is about 45% off its 52-week high of 1,524.

Down or out?

"The forthcoming rally in the stock and corporate bonds market will be one that investors will talk about for decades to come," says Gary Clemmons of Baytown, Texas-based Texas Capital Management.

Jim Elder of Montrose, Colo.-based ElderAdo Financial strikes a similar chord: "With stocks and bonds at these current valuations, we feel like kids in a candy store."

But Richard Coe of Coe Financial Services in Wichita, Kan., says there might well be more stock-price erosion in store. "Averting a worst-case scenario does not mean it can't get considerably worse," he says. "I believe the stock market will need some reasons to go up -- today it is hard to find the reasons other than that stock prices seem low."

And Kenny Landgraf, of Austin, Texas-based Kenjol Capital Management takes a harder line, rising the possibility that the near sacrosanct buy-and-hold approach to equities as a dead letter. "Investors have nothing to show for that investment discipline since the late 90s," he says. "The animal spirit of businesses, consumers and investors has been smashed and will take a much longer time to repair than it took to destroy."

The ACI, which is based on a monthly survey of independent RIAs, 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.

In keeping with the view that equities are cheap but not necessarily in a process of |image2|bottoming, outlook on the stock market was the weakest of the ACI's four components in November. RIA sentiment puts a meaningful economic recovery about a year away.

It will be interesting to see how this last guess plays out in light of the National Bureau of Economic Research's recent pronouncement that the U.S. economy has been in recession since December 2007. By post-World War II standards a year is an unusually long time for a fullblown recession to endure; a two-year-long recession would be extraordinary.

Consumer sentiment was on a slight uptrend last month as well. The Conference Board's Consumer Confidence Index rose to 44.9 from 38.8 in October.

Advisorbenchmarking is a subsidiary of Rydex Investments.-FWR

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