U.S. investor sentiment rebounded this month following the drastic drop it took in the wake of hurricanes Katrina and Rita in September.

With the moderation of gas and oil prices over the past month, investor sentiment is now up from September, as measured by the UBS Index of Investor Optimism; but it still hasn’t returned to the level it reached in August.

Concerns about the investment climate are reflected in the perceptions by most investors (66%) that the U.S. economy is either in a slowdown (52%) or a recession (14%). Two thirds of these investors predict that economic recovery will not come for at least two years.

These economic assessments are significantly higher than they were at the beginning of the year, when 57% of investors felt the economy was in a recovery or sustained expansion, and only 42% judged the economy to be in a slowdown.

“Following last month’s drastic decline in investor optimism, the question was whether or not the dip was permanent or merely a short-term reaction to the storms,” said UBS associate strategist Robin Miranda. “The recovery is not complete and may indicate a downward trend in investor sentiment.”

Modest gains in investor optimism were stimulated by slightly lower energy prices, but investors continue to identify this area of the economy as the most harmful, UBS said. Eighty per cent say energy costs are hurting the investment climate “a lot”, up from 71% who said that last July, well before the damage wrought by Katrina and Rita.

While optimism recovered, investor concerns about the federal budget deficit, interest rates and the stock market have grown since the summer. Inflation fears have subsided somewhat since the summer in part because gas and oil prices have fallen in recent weeks.

Investors are slightly less optimistic about the performance of the stock market over the next 12 months. 39% of investors are optimistic versus 42% last month and 45% in August.

The average expected rate of return on investor portfolios over the next 12 months is 9.7% (down from 11.1% in September). 51% of investors say now is a good time to invest in the financial markets. This is unchanged since last month but significantly lower than readings this summer (59% in August, 60% in July, 58% in June).

Other areas that investors judge to be hurting the investment climate a lot include outsourcing of jobs to foreign countries and the war with Iraq. The economic impact of Katrina and Rita also remains on investor’s minds, with 55% rating the storms as having a severe impact on the investment climate.

The latest reading was conducted October 1 to 16. Investors are defined as any person who is head of a household or a spouse in any U.S. household with total savings and investments of US$10,000 or more. The sampling error in the results is plus or minus four percentage points.