July views on U.S. economy and stock market heartwarming -- for contrarians. Advisorbenchmarking's Advisor Confidence Index (ACI) slumped by nearly 11% to hit a new all-time low of 86.27 this month.

Advisorbenchmarking, an affiliate of Rydex Investments, began tracking RIA sentiment in 2004.

The index is based on monthly surveys of independent advisors. It  goes from a "very negative" 33.33 to a|image1| "very positive" 166.67. Its mid point, 100, represents a neutral outlook on the stock market and the economy.

The ACI's previous record low came in March 2008 when it hit 86.90. It reached an all-time high of 121.41 in December 2005.

You name it

As advisors who participated in the July ACI survey tell it, the recent negativity boils down to a continuation of familiar woes -- high energy prices, real-estate woes, indebted consumers, declining security prices -- along with bracing novelties like the spectacle of a couple of high-profile bank runs.

"Clients are getting very nervous and more so than any time in the last 20 years," Pat Raskob of Tucson, Ariz.-based Raskob Kambourian Financial, writes in a commentary submitted along with the latest ACI survey. "[They're] fearful their retirement is going down the drain [and they're] mad that Congress is not doing anything but bickering (and) accomplishing nothing of value."

All four of the ACI components fell back in July, with their views on the stock-market coming closest to neutral.

ACI components July 2008

Current economic outlook

-17.53%

Six-month economic outlook -12.04% 12-month economic outlook -11.72% Stock-market outlook -3.20%

And though the Reuters/University of Michigan Consumer Sentiment gauge rose to 61.2 in July from 56.4 in June, the index's minders were at pains to dismiss this jump as a "dead-cat bounce."

Contrarian's delight

In any case, the apparently ebullient July 2008 move on the Michigan Consumer scale still showed sentiment 32% lower than it was in July 2007. And the Consumer Expectations component of the index was 53.5 in the latest survey versus 81.5 in the year-earlier period -- a rate of decline that has always presaged a recession, according to the University of Michigan.

"The American consumer accounts for two-thirds of economic spending, with business making up the difference," writes George Cheatham of Columbia, Ky.-based American Financial Consultants. "With no credit, property values falling, incomes stagnant, job security a thing of the past and higher fuel, utilities and food costs sucking up every dime of disposable income, the American consumer is tapped out."

James Dailey of Harrisburg, Pa.-based TEAM Financial Managers has an even starker message. "Our base case since last July has been for a 30% bear market from the peak, with downside risk to 50% should the economy enter into a deep recession or worse," he writes. "We are seeing increasing signals that the more negative outcome is more likely."

Adds Dailey: "As we have been saying for 12 months, return of capital remains the priority over return on capital." -FWR

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