Advisors’ confidence edges up as inflation concerns persist

Advisors’ confidence rose to +1 in July, up from -1 in June, according to the Financial Advisor Confidence Outlook (FACO) survey of 199 advisors conducted in July. The increase followed a score of 7 in May.

The FACO reading climbed to +1 from -1 in June. The survey found the global economic system score jumped 17 points to -34 from -51, the largest single-month improvement. The overall economy score rose 10 points to 38, one point below this year’s high of 39 recorded in January.

Despite the gains, many advisors expect continued volatility. Forty-three percent of respondents said they expect the global economic system to be more volatile over the next three months, 48% expect volatility to hold steady, and 9% expect it to decline. Views on the U.S. economy were split: 48% expect growth over the next three months, 42% expect it to hold steady, and 10% expect contraction.

Inflation pressure and uncertainty about interest rates were prominent concerns. Several respondents pointed to higher oil prices and persistent inflation as factors complicating rate forecasts. A respondent wrote: “Interest rate levels directly affect profitability and risk appetite. Rising rates improve net interest margins but increase credit risk, driving demand for ALM, risk management, and stress testing consulting. Lower rates pressure profits and increase demand for cost optimization and transformation consulting.”

Political risk also affected sentiment. In June, respondents cited regional tensions involving Iran and a shutdown of the Strait of Hormuz as major worries. Many advisors said midterm elections and broader political instability will be factors to monitor. The government policy score fell to 5 in July from 9 in June, the second consecutive monthly decline and the lowest reading since April. Over the next three months, 23% of advisors expect monetary policy to have a positive impact on clients’ financial wellbeing, 26% expect new legislation to help clients, and 19% expect policy actions to have a negative effect.

On behavioral measures, expected client risk tolerance remained at -5, unchanged from June, with 67% of advisors saying they expect it to stay the same over the coming quarter. Asset allocation outlooks moved from -10 to -6. Seventy percent of advisors plan to keep asset allocation advice the same over the next three months, 18% plan to be more cautious and 12% plan to be more aggressive.

The July FACO reading is the third time this year that advisors have reported optimistic outlooks for both the global economic system and the overall economy.