Adviser Optimism Inches Up in May

The Advisor Confidence Index (ACI), a benchmark of financial advisers’ views on the U.S. economy and the stock market, reversed course and rose 6% during May, to 114.8.

The upward tick in confidence comes a month after the index fell almost 6.8%, to its lowest point since the start of the year. Stock prices were rising too far, too fast, advisers believed, and the underlying economic recovery was still too fragile to support record-high valuations.

This recent uptick in optimism suggests advisers may be capitulating to the bull market and could perceive that the economic foundation of the recovery is getting stronger. Many still suggest that the markets are being supported more by government stimulus than a strong economy.

“For 2013, it has been buy-the-dip as the market has grinded higher,” said Kenny Landgraf of Kenjol Capital Management. “This is probably the most hated bull-market rally. The bears and their cash positions earning zero are getting pulled off the sidelines. Central banks will continue to provide liquidity for the market and prevent companies from running out of cash. Interest rate yields are terrible. As bond investments mature, the bond investors are slowly forced to take more risk to replace the same yield as their maturing debt. We expect a sideways market and then we will hit new highs in the fall again.”

All four indicators that make up the index moved up in May. The component that tracks optimism over the current state of the economy and the markets rose by 7% each. That was tempered a bit by advisers’ outlook for the economy in mid-2014, where optimism grew by only 3%.

Several advisers suggested the improved picture was in fact due to the underlying economy getting stronger. Housing and unemployment numbers seem to be getting better and that is fueling more aggressive market positions.

“This head-scratching rally is no longer a mystery,” said Jonathan Foster of Angeles Wealth Management. “The Federal deficit is vaporizing, and even California is now projecting a 2014 surplus. This is still the rally everyone loves to hate, but soon, even ‘recalcitrant retail’ may be rushing in to catch up.”

The Advisor Confidence Index is a benchmark that gauges advisers’ views on the economy and the stock market. The index captures the views of a panel of some 130 financial advisers who agreed to participate on a monthly basis. The survey asks four questions: an adviser’s views on the economy and on the stock market in six months and in 12 months, on a scale from most pessimistic to most optimistic. The cumulative average is used to determine the index.