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The latest MoneyShow sentiment survey reveals a stubborn caution in the face of the improving economic stats and rising share prices, writes senior editor Igor Greenwald.

Investors are gradually warming to smaller US stocks despite persistent doubts about the fate of the economy and the current market rally, according to the latest MoneyShow.com sentiment survey.

Just 14% of the 1,923 MoneyShow members polled late last month expected the S&P  500 index to advance 10% or more over the next year. In contrast, 21% expect a decline, including 10% anticipating a loss of more than 10%.

Fewer than 9% of the respondents expected economic growth to top 3% in 2012, even though that wouldn’t require much of an acceleration from the 2.8% GDP growth rate recently reported for the fourth quarter of 2011. Sixty-one percent expect more modest growth along the lines of last year’s 1.7% increase. More than 23% guessed that GDP growth “will slow to just above zero,” and nearly 7% predicted a new recession.

Two-thirds of investors surveyed expect an unemployment rate of 8% or more by the end of the year, including the 15% who believe it will top 9%. But that was before the government reported that the jobless rate took a surprising tumble to 8.3% in January.

Investors are almost evenly divided on the likely outcome of the presidential election, with 51% predicting President Obama’s re-election and 49% anticipating a Republican victory.

A slight majority expect the housing market to get worse this year. Twenty-eight percent think it will bottom sometime in 2012, while 16% believe the lows are in already.

Not surprisingly, given the tempered outlook, 22% of those surveyed still have half of their portfolio in cash. That’s down just a little from the 26% displaying similar caution at the time of the World MoneyShow Chicago last October, despite a 13% market rally over that span.

Investors have grown somewhat more optimistic over the long run, however. Back in October, 39% saw stocks in a long-term bear market and headed for new lows, while only 4% thought the bull market that began in 2009 was still alive.

Now the optimists, at 16%, trail the pessimists by a single percentage point, with the remainder opting for the muddle-through scenario.

Now as then, large-cap US stocks remain the favorite destination for new purchases, with 32% identifying them as the most attractive asset class in the latest survey. But US midcaps and small caps have gained ground, and are now the second most popular target for new investments at 21%, up from 15% in October. Precious metals were next, favored by 13% of the respondents.

That’s way ahead of long-term Treasury bonds, which topped the list for a mere 1.68% of the respondents despite outperforming all asset classes last year. Has any multi-decade bull market—to say nothing of investing bubbles—ended with so few investors caring?

From a contrarian perspective, this could be a warning sign for equities. While hardly over-loved, they are nowhere near as unpopular as bonds.

On the other hand, the slowly warming attitude toward stocks appears to be trailing the market price action. Until it catches up, the rally could roll on as latecomers pay up.

Read the full results here…

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