DESPITE WARINESS, ADVISERS EXPECT IMPROVEMENT

The global economic meltdown that will forever define 2008 had only a negligible effect on the optimism of financial advisers as they headed into 2009.

An InvestmentNews survey of more than 1,000 advisers last month found that 58% were less optimistic about the economy for 2009 than they were at the beginning of 2008. By way of comparison, a similar survey a year ago found that 54% of respondents were less optimistic about the economy going into 2008 than they were in 2007.

Twenty-seven percent, meanwhile, said they were more optimistic going into 2009 than they were a year earlier, and 15% said that their level of optimism had not changed, the most recent survey found.

“As we are heading into the new year, I can’t think of a time in recent memory when people were so unsure about what’s going to happen with the economy,” said David Kelly, chief market strategist at JPMorgan Funds in New York. “It’s not just that people feel badly, it’s that there is genuine uncertainty.”

Mr. Kelly echoed the sentiments of many of the financial advisers surveyed by making a case for potential economic progress in spite of the dark clouds looming overhead.

He cited the global economic recession and an anticipated policy response from the Obama administration as “two powerful forces” about to collide.

“Everybody seems to be rowing in the same direction and in the long run it will be enough [to move the economy forward], but I don’t know if it will be enough to help us in 2009,” he said.

Despite their pessimism, the majority of advisers indicated that they believe the foundation of a recovery is already taking shape.

When asked about the effect of the economic-stimulus policies proposed by President-elect Barack Obama, 65% of respondents said they anticipated a measurable positive effect.

Along the same lines, 67% of respondents expressed confidence that the government’s intervention will be enough to pull the economy out of its current tailspin, and 67% also said they expect the recession to end in 2009.

“I’m more optimistic than I was a year ago, due to the fact that it is impossible to imagine a year as bad as 2008,” said Tom Sowanick, chief investment officer for Clearbrook Financial LLC in Princeton, N.J.

Mr. Sowanick, whose firm manages $22 billion, pointed to deeply discounted securities and plans for big government spending programs as indicators of good things to come in 2009.

“From a capital markets perspective, just about everything is priced so cheaply right now, and these are values that most of us have never seen,” he said.

A majority of advisers surveyed (57.6%) believed the Dow Jones Industrial Average reached a market bottom in 2008. The Dow, which closed at a 12-month low of 7,552 on Nov. 20, had declined by 33% in 2008, through Dec. 18 when it closed at 8,824.

Of those advisers who felt the index would continue to fall in 2009, 44% said it would drop to between 7,000 and 7,499.

The next largest percentage of respondents (20.1%) said the index would fall to between 7,500 and 8,000.

The most pessimistic advisers (7.2%) said the Dow would fall below 6,000 in 2009.

In a separate question asking where the Dow would be at the end of 2009, 42.6% of advisers said the index would finish the year above 10,000, while 32.8% said it would finish between 9,001 and 10,000.

Only 1.4% of respondents said the index would close 2009 below 8,000.

“I see the turnaround coming sometime in 2010,” said Arnie Harris, owner of Harris Financial Planning & Consulting Group in Chicago.

“Despite wanting to be optimistic, I’m more pessimistic right now because it doesn’t look like things are going to turn around any time soon,” he said. “There might be some market rallies in 2009, but not a bottom yet.”

Mr. Harris, who oversees $85 million in client assets, has been advising clients for more than a year to move to cash and stay there. His average client currently has about a 50% weighting in cash, he said.

Cash is also currently king for Gary Clemmons, a portfolio manager at Texas Capital Management in Bayton, Texas.

The fundamental difference between Mr. Harris and Mr. Clemmons, whose firm manages $85 million for clients, is that Mr. Clemmons is ready to jump back into the market.

“I think the worst of this storm is over and it’s time to start accumulating stocks at a high rate,” he said. “In my opinion, the recession will be over by the end of the first quarter.”

Mr. Clemmons, who started building up cash positions during the spring and is currently using an average cash weighting of 84% in his client portfolios, said an increased appetite by institutional-class investors has emerged as a key indicator of a market turnaround.

By the end of March, he expects his clients’ average cash positions to be down to 5%.

The strategy is generally in line with the views of 63% of the survey respondents, who said they would advise an increase in equity allocations in 2009.

The financial sector was seen as the area likely to post the biggest gains in the year ahead, with 48% of advisers selecting the category.

The retail sector was selected as likely to post the biggest gains in 2009 by just 2% of advisers.

Advisers surveyed were most optimistic regarding their outlook for the credit markets, which nearly froze in September and October.

Nearly 90% of survey respondents said they expect the credit markets to improve in 2009.

“The credit markets are now out of intensive care and in rehab,” said Tim Pettee, chief investment officer at SunAmerica Mutual Funds in Jersey City, N.J.

“The bad news, however, is that we still have an overall economic environment that none of us has ever experienced,” he said.

E-mail Jeff Benjamin at [email protected].