Weakening dollar, oil prices, housing slump weigh on U.S. consumers, mkts. This month the Advisor Confidence Index (ACI) slipped into negative territory for the first time since Advisorbenchmarking began tracking sentiment among independent RIAs on the U.S. economy and stock market in April 2004.

The ACI, which is based on a monthly survey of 150 independent RIAs, fell to 95.96 in November from 105.13 in October, a 9% drop. |image2|Last month, though the ACI actually rebounded, a majority of the RIAs surveyed (68%) said they felt the U.S. was slipping into a recession.

The ACI 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. The index saw an all-time high of 121.41 in December 2005. Up until this month, the ACI has come close to the line -- most notably in June 2006 and in September 2007 -- but has managed to stay in positive territory.

The November drop came on the back of pervasive insecurity, said Frederick Wright of Atlanta-based Smith & Howard. While "the housing slump, credit crunch and high oil prices" put pressure on consumers, the specter of inflation is once again on the loose. And though the degree to which these factors should be making themselves felt are debatable, these "scenarios are negatives for the stock market," he says. "This uncertainty has caused the recent swoon in the market."

All four of the ACI's components declined in November.

ACI components November 2007

Current economic outlook

-7.30% Six-month economic outlook -10.58% 12-month economic outlook -11.24% Stock-market outlook -5.88%

Meanwhile investor sentiment plummeted in November, falling 26 points to 44, less than half its level of 103 in January and its lowest point since Hurricane Katrina in September 2005, according to UBS' Index of Investor Optimism.

Wobbly

More than half of the advisors surveyed in early November said that housing prices may weaken further than expected and consumer spending will slow down, contributing to a weakening economy. About one third (33%) of advisors said that the decline in value of the U.S. dollar against other major currencies would continue; about one fourth said the dollar would soon bounce back, or at least retrace some of its losses.

"Best case, the lower dollar improves U.S. exports and supports profits of multinationals, without derailing the emerging markets' manufacturing industries," said Bill Ramsay of Raleigh, N.C.-based Financial Symmetry. "Worst case, the dollar continues to fall, and combined with the failure of many U.S. homeowners to pay back their mortgages, there is a crisis of confidence in the U.S. dollar."

Meanwhile using "sub-prime" crisis as shorthand for the U.S. economy's troubles is misleading, according to James Dailey of TEAM Financial Managers in Harrisburg, Pa. "The credit cycle has likely turned with a stock market still valued with a [price-to-earnings ratio] of over 20 times trailing net earnings using normalized profit margins," he said. "Add on an emerging global industrial slowdown over the coming months and people should be more concerned about return of capital rather than return on capital."

Still, Ian Naismith of Sarasota, Fla.-based Naismith Capital Strategies sees the "sub-prime debacle" creating "some wonderful buying opportunities in 2008." Until then though, "agility and not tolerating deep losses" remain watchwords.

Advisorbenchmarking is an affiliate of Rydex Investments.-FWR

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