Investors Trim Their Sails—a Bit

05/13/2008 12:00 am EST


Howard Gold

Founder & President, GoldenEgg Investing

Las Vegas, NV-They're still bullish, but a little more wary. That's what the latest Investor Sentiment index appears to show.

The active, sophisticated investors who use our site remain solidly in the bullish camp. But their optimism has waned over the last few months as markets have been buffeted by record-high oil prices, a global financial crisis, and persistent fears about a recession in the US.

Some 56% of respondents to our survey, completed last Saturday, say the Standard & Poor's 500 index will rise by the end of the year. Of those, a mere 13% believe it will rise 10% or more (we call them very bullish) while 43% think it will rise, but not by that much. (See results here.)

That contrasts with the 60% who placed themselves in the bullish camp in February and the 63% who had bullish outlooks last year (see table). It marks a modest but notable decline in investor optimism during that time. The investors we surveyed are also slightly less bullish than financial advisors polled in April.

  Investors' Survey Investors' Survey Investors' Survey
Sentiment May 2008* February 2008* September 2007**
Very Bullish 13% 16% 14%
Bullish 43% 44% 49%
Neutral 18% 14% 20%
Bearish 16% 16% 13%
Very Bearish 10% 10% 4%
Total Bulls 56% 60% 63%
Total Bears 26% 26% 17%
Favorite Assets      
Foreign Stocks 24% 22% 30%
Large US Stocks 19% 21% 29%
Commodities 42% 39% 17%
Small US Stocks 10% 8% 13%
Bonds 1% 3% 3%
Real Estate 2% 3% NM
Cash 2% 4% 8%
*Through the end of 2008      
**Through the end of 2007      

But our users are not throwing in their lot with the permabears. Only 26% think the S&P will be lower by the end of the year, and only 10% of those are very bearish, i.e., they're looking for the index to fall at least 10% by December 31st. That's exactly the breakdown we recorded in February's poll.

The percentage of  "none of the above," or neutral, whose adherents say stocks will stay steady, was 18%, up four percentage points from February's results.

Their caution may reflect uncertainty rather than pessimism. In contrast to the vast majority of Americans and many investment experts, only a small percentage of our respondents see a US recession on the horizon. By and large they expect Federal Reserve chairman Ben Bernanke to hold short-term interest rates steady, and they continue to see inflation as a looming threat. That's probably why commodities remain the hot asset class for this group.

Despite some fraying at the edges, our respondents' optimism remains intact. A plurality, some 43%, looks for US economic growth to increase by the end of the year. Fancy that! Another 39% think gross domestic product will grow, but more slowly. And a shockingly small 18% are looking for negative GDP growth this year, the commonly used definition of a recession.

In contrast to February, when seven out of every ten people who answered our survey said the Federal Reserve would continue to cut short-term rates, now almost an equal amount-67%-believes Bernanke and Co. will hold rates steady through the end of 2008. That may be good news for the US dollar, which has firmed of late.

But it also could mean that our users think the Fed chairman, having tamed the beast of financial calamity and staved off recession, is now setting his sights on the other winged monster, inflation.

Some 79% of the investors surveyed think inflation will increase over the rest of the year. That's an astonishingly high proportion-ten percentage points more than the number who expected more inflation back in our February survey.

So, it's no surprise that the largest percentage ever-42%-thought commodities would be the best performing asset class in 2008, a slight increase over February and a huge jump from the 17% who preferred them last September.

The responses came, of course, as crude oil set all-time records, topping $125, and gold and grains have come off their recent peaks. So, some of it may be attributed to investors' chasing the latest trend.

The users have also cooled on large US stocks-only 19% thought they would be the best performing asset class, down ten percentage points from last September. 

Foreign stocks, on the other hand, have become more popular among our users again: Some 24% think they'll do the best, up a bit from February.  Perhaps our users realize that US stocks have outperformed many overseas markets since last fall, making the valuation of overseas stocks more attractive again. Small-cap US stocks picked up some interest (10% of the people surveyed like them), but bonds, cash, and real estate investment trusts aren't on the radar screen.

The results of the new Investor Sentiment Indicator were presented here at the Las Vegas Money Show. Some 492 respondents were drawn from's Investors subscriber list, comprising self-directed individual investors. The maximum margin of error is within 4.3 percentage points of the proportion reported using a 95% confidence level.

Our new survey appears as other investor polls show growing bullishness among investors amid growing confidence that the worst of the credit crisis is over.

The American Association of Individual Investors last week registered 52.8% bullish sentiment and only 24.7% bearishness in its weekly poll of its members on

The results were the exact opposite in January and again in March, when overwhelmingly negative sentiment may have pointed to a buying opportunity. Market Vane and Consensus Inc. are showing an up tick in bullishness among institutional investors, too.

So, what does it mean when our group of sophisticated individual investors is cooling off a bit just as everyone else is just getting warm? The market will tell us the answer over the next few months, but until then we might as well enjoy the ride.

Howard R. Gold is executive editor of The opinions expressed here are his alone and do not necessarily reflect the views of InterShow.

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