By Andrew Gluck

A new gloom has descended on some of America's best investment advisors.

Bill Bengen, known for his groundbreaking work on retirement withdrawal distributions, says we're ten years into a bear market that's likely to last another five or ten years.

Tom Connelly hasn't abandoned equities, but he is managing portfolios carefully, positioning clients for a variety of possible scenarios.

Richie Lee, while insisting he is optimistic about the long-term future, says the economic malaise could be stretched out much longer than in normal economic cycles and he sees a "total lack of leadership from a political standpoint."

Robert Levitt, a globe-trotting advisor with investments worldwide, says he does not see how the U.S. will again become the engine of growth worldwide.

Jerry Gray says the best-case scenario is three to five years of malaise and mid-single-digit returns on stocks, but there is about a 20% chance of much worse.

Bill Carter, the most bullish of our panel, says stocks are likely to offer 6% to 9% annualized returns over the next five years but adds that any sudden unexpected shocks to the economy could easily derail the anemic recovery and cause another global tailspin.

You can dismiss such gloomy outlooks by saying that the consensus is always wrong. You can cling to American ingenuity and say we will find a way out of this mess. But these are among the most respected independent advisors in the nation and the fact all of them are so skittish about the five-year outlook is troubling.

These advisors were last interviewed for a column I wrote for the April 2008 issue of Financial Advisor entitled, "America's Financial Crisis." "Is it just another bear market or a period marking the end of The American Century?" was the question I sought to answer. The advisors interviewed agreed that the then-unfolding recession had caused a situation that indeed was "different this time," and the story heralded their fears about the American economy. However, no one predicted the near-collapse of the world's financial system that followed just six months later.

Now, these advisors sound more humble. That's to be expected. But what you might not expect this far into a recovery is their pessimism about the American economy and financial markets. Here is what they said.

William Bengen devised "the 4% drawdown rule," a thesis that took him years to research and articulate in a series of articles in the Financial Planning Association's Journal of Financial Planning. Based on historical data and asset allocation models, Bengen's research forms the bedrock of sustainable retirement withdrawal strategies used by many financial planners. If Bengen was concerned 30 months ago, he is fearful now-even with stocks 30% off their all-time highs.

Bengen, who held 35% in stocks 30 months ago, now has allocated just 10% to stocks and they are in mining issues, gold bullion ETFs and some utility mutual funds. His other investments are in short- and intermediate-term U.S. government bond funds. "I'm keeping it very simple so I can get in and out quickly," says Bengen, who was an adept long-term stock picker for much of his career as an advisor.

Like several of the advisors interviewed for this story, Bengen says he's spent a lot of time over the past two and a half years researching macroeconomic issues. "In this environment, macroeconomics trumps everything," he says. "Even if you can pick a great company, a decline in the stock market of 40% is going to trash its value."

Referencing the book This Time Is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth Rogoff, Bengen says financial crises have historically been solved by countries with fiscal and monetary policies. But this time the entire Western world is facing the same problems. If all of the nations involved apply the same solutions-stimulus programs, bailouts or austerity-it increases the chances of a currency crisis.

As of early July, Bengen believes the stock market is overvalued by 20% to 30%. One important measure he cites is the ten-year trailing price/earnings ratio on the Standard & Poor's 500. It has hovered recently at about 19 where its long-term historical average is 16. Bengen maintains that, for periods when the economy has wrung excesses out of the system, the ten-year trailing p/e ratio should decline to 8.

"This shows you how far down we can go before the bear market is fully discounted," says Bengen, a CFP licensee who manages a small "lifestyle" money management practice and does not accept new clients. "The stock market has been overvalued since 1993 as a result of the massive debt bubble. So people have forgotten what fair value looks like."

Bengen is avoiding foreign markets as well, believing a further decline in U.S. stocks will drag other markets down with it. However, he says he will consider investing in some emerging markets if their stock prices fall and valuations become more attractive.

Bengen says he believes another stimulus might jolt the economy out of the recession but has little faith in the political leadership to create the right kind of stimulus. "If we have another stimulus, it must be better targeted than the last one, which threw a trillion dollars down the drain," Bengen says. "Building roads, bridges, and strengthening America's infrastructure would be good stimulus spending." He says stimulus was wasted on buying bad debt from banks to strengthen their balance sheets when it should have been used to strengthen the balance sheets of individuals.

Bengen thinks odds are increasing that the economy will fall into recession next year. "And it will be most unpleasant because going into a recession with a 9.5% jobless rate this time is a lot different from entering a recession with a 4% unemployment rate," he says. "Valuations are too high, risks remain elevated and I don't see any reason to risk clients' capital. I may underperform, but this environment makes it impossible to invest intelligently."

Tom Connelly's grim assessment of the economy and markets was what spurred my April 2008 column. At that time, Connelly, who runs Versant Capital Management in Phoenix, said that America had "gone from a 1% to 3% chance of a catastrophic event in our financial system a year ago [in 2007] to a 25% or 30% chance." But Connelly says the events of September 2008 were even worse than he had imagined.

"When history records the story of what happened in the financial crisis, I think we're going to find it was a lot worse than people understood," says Connelly, a CFA who manages about $285 million and also serves as chairman of the investment board of the Arizona state employee pension fund. "The Fed acted decisively, and without its actions we could have experienced something as bad as the Great Depression. The money markets were not functioning and international trade stopped because no one believed in the financing from the biggest banks in the world, and we were probably just hours-maybe even minutes-away from something that could have been much worse."

Connelly does not believe in betting everything on a single economic scenario. Rather, he makes forecasts by considering a range of economic scenarios and assessing the probability of each.

Connelly says there's about a 30% chance over the next three to five years that the economy will be hobbled by deflation while also suffering low growth or shrinking gross domestic product. But it is just as likely, he says, that we will experience a Goldilocks economy in which we muddle along with sluggish growth and markets with low returns. He puts the chance of a high-inflation scenario at 20% and the chance for breakout growth at 20%. Right now, Connelly says he is coming to believe that the deflationary scenario is unfolding as he has watched leading indicators from the Economic Cycle Research Institute turn negative in recent weeks.

However, that does not mean he has abandoned stocks. Connelly says he's managing money to capitalize across the spectrum of scenarios he regards as likely. "It's true that an economic shock is likely to make all stocks tumble," says Connelly. "But you cannot think in terms of black and white and bet all your chips on either deflation or inflation. We just don't know enough to have that kind of certainty."

So large-cap stocks with established brands and franchises remain part of Connelly's client portfolios, alongside gold ETFs, farmland, energy and agricultural companies.

Connelly calls himself a "right-wing creature" but nonetheless believes the economy probably needs another government stimulus. "I don't think supply-side economics makes sense right now, even though I've been in that camp historically," says Connelly, adding that he doesn't thinks the current stimulus was totally wasted. "We're in a liquidity trap. The Keynesians are more right on right now."

Jerry Gray, chief investment officer at MAI in Cleveland, which manages about $1.6 billion for high-net-worth individuals, including some of the world's best athletes, expects average annual returns on stocks over the next five years in the 4% to 6% range.

"Because of all the consumer debt and government debt created to provide stimulus and prevent a steeper drop, we are likely to experience an extended period of below-average growth," Gray says. "We'll have a recovery drawn out so long that we won't feel like we're in recovery."

Gray, also a CFA, says the hangover in housing shows no signs of letting up. Even as housing prices have stabilized, banks still own a "shadow inventory" of real estate they cannot sell and have not put on the market. Meanwhile, many individual home owners are in the same situation, holding back on a sale and waiting for a rebound. "It will take many years for a recovery to occur in housing prices," says Gray.

A slow recovery, says Gray, is the most likely scenario, with an 80% chance of occurring, but he says there is about a 5% probability of a hyperinflationary period in which interest rates become uncontrollable and the national debt becomes unsustainable. There is excess capacity in manufacturing, and emerging market economies are coming online with new manufacturing plants they are willing to run at lower profit margins, so Gray believes the world will be awash in excess capacity for years to come but is unlikely to face deflation.

Yet he says there is still a 15% chance of a deflationary cycle. With the Tea Party movement in the U.S. putting increasing pressure on the government to stop spending to clean up its balance sheet and governments across Europe now committing to austerity programs, he says excessive retrenchment could smother the fragile economy.

However, the best and most likely scenario is one in which the U.S. muddles through the next five years while deleveraging. "While this scenario is nothing to get excited about," Gray says. "It's also not Armageddon."

Richie Lee, whose Dallas-based firm manages about $835 million, says he expects the next three to five years to be much like the late 1970s.

"I'm thinking we're going to see sawtooth markets because no one is entirely sure about what is going on," says Lee. To manage the expected volatility, he says he is looking for managers with a different set of skills than he sought in the past.

Lee says that in a bull market, stocks rise about 80% of the time and decline just 20% of the time. In bear markets, he says, stocks are as likely to go up in a given day as they are to drop, and while index funds worked in the long-term bull market, managing money in a secular bear market is entirely different. Index funds have lost money in the past ten years.

Instead, Lee is seeking managers of mutual funds and hedge funds that have a track record of success while being agile. "You need to populate portfolios with managers who will maneuver in this market," he says.

He cites First Pacific Advisors' Crescent Fund as an example. He says manager Steve Romick, who also handles separate accounts, has shown returns of about 10% annually over the past decade even as markets lost about 1% a year. The fund employs a contrarian style that looks at a company's private market value rather than its value within its peer group, and it will invest anywhere in the capital structure of a company-in stock, bonds, preferred shares or convertible bonds.

Another example, Lee says, is PIMCO's All Asset Fund in which manager Robert Arnott shifts among a wide range of asset classes by investing in about 40 PIMCO mutual funds. After the financial crisis in October 2008, Arnott took advantage of historically low valuations in emerging market debt and in junk bonds, which paid off for the fund.

But Lee's outlook is not bright. He says it will take five to ten years to break "the entitlement structure" of the U.S. economy, but he is unsure how the country will work its way through the deleveraging crisis. He believes the American mind-set will undergo a dramatic change as deleveraging slowly causes economic pain in the form of dashed retirement hopes.

People will make up for shortfalls in retirement savings by working longer, and the concept of retirement will be rethought, with more people staying in the workforce into their late 60s and early 70s, he says. Americans will place less emphasis on material values and more on family values, Lee says, as deflation and changes in technology make vacations and entertainment less costly.

"People will have to adjust to the economic reality," he says. "It means a change in lifestyle. But I think the American people can accept this more than most people realize."

Bill Carter, who was perhaps the least gloomy of the group of advisors interviewed in April 2008, is again the most sanguine now. "I'm in new neutral now," says Carter, whose Dallas firm manages about $800 million. "There are certainly signs that we're coming out of recession."

As second-quarter corporate earnings were beginning to be reported, Carter was buoyed by reports of larger than expected profits from Intel, and he predicted corporate earnings could surprise many people by being more on the positive side. "That could very quickly change consumer sentiment," he says.

Carter says corporate balance sheets are as strong as they've been in many years, but companies remain fearful about spending. "If corporate America feels some confidence, it will restart spending and hiring," he says. "But the administration must articulate a clear plan for growth, and I don't know if we're going to see that."

While saying he is "non-political," Carter believes that if the Obama administration does not provide a clear growth strategy, Republicans will gain seats in Congress in November. This, in turn, will block any plans for further government spending and give people more confidence that we are on a path toward growth.

Carter says that he's always been rewarded in the past for staying invested in stocks even through the most difficult periods. So while he has diversified toward alternative investments, Treasury Inflation Protection bonds and international bonds, his client portfolios have not eliminated stocks. "In March 2009, when the stock market was hitting its lows after the financial crisis, who would have thought that stocks would end up having an excellent year," asks Carter, explaining why he remains invested in equities. "It seems to me that we may very well be at the very beginning of another bull market now-although it is too early for me to say that with any conviction."

Still, Carter says he remains nervous because of the fragility of the recovery. "Interest rates are as low as they can go and the budget deficit is sky high, so there are not many cures left if something bad happens," he says. "I don't see any negative events on the horizon, but if one comes up it could have a very negative impact."

Robert Levitt is unique among independent wealth managers in that he moves around the world in search of investment ideas. (Though Levitt Capital Management is headquartered in Boca Raton, Fla., Levitt himself is based in France.) In recent months, he has been through Jordan, Israel and Sweden. In 2009, he spent several months in Kuala Lumpur, Malaysia, and he is planning on spending the final three months of 2010 in Indonesia before heading to Africa early next year. But his worldview currently is bleak for America and the West.

"It's a risky time to commit money to a long-term buy-and-hold strategy," says Levitt, "and I expect it to stay the same for the next few years."

He says the U.S. and Europe are trapped in a high-risk environment in trying to deleverage. Another stimulus package might not be possible politically. But even if stimulus was politically tenable and would bolster growth in the short term, it could cause investors to lose faith in currencies backed by government promises. Stimulus risks a worsening debt crisis.

Arguments for austerity, meanwhile, are also fraught with risk. Imposing austerity in a balance sheet recession softens consumption and growth and could thrust the already slowing economies of the developed world into a full-blown recession. "So we are staying out of the game," says Levitt. "We are sitting out this hand."

However, his strategy is to find pockets of opportunity. For instance, an investment theme he is pursuing now focuses on the globalization of platforms for building automobiles. Ford and GM, he says, have for many years built one model car in Asia, another model in Europe and a different oneĀ in the U.S. But the automakers are now beginning to standardize the way they build vehicles and parts. While only 10% of the cars manufactured by the big automakers are built on global platforms today, by 2014 some two-thirds of them will be. The theme benefits not just the carmakers but parts and electronic components makers as well.

"There are still interesting opportunities, and there are some economies, like Indonesia, that are booming," says Levitt. His firm's track record since inception in 2003 sports an 11.25% annualized return.

Editor-at-large Andrew Gluck, a veteran financial writer, owns Advisor Products Inc., a marketing technology company serving 1,800 advisory firms.