Cash Is King As Bearish Sentiment Grows

08/07/2008 12:00 am EST


Howard Gold

Founder & President, GoldenEgg Investing

August 7, 2008

San Francisco—All right, already, maybe it’s not a bull market after all!

That’s what a growing number of individual investors appear to be saying, according to the latest Investor Sentiment indicator. And they’re putting their money where their mouths are by putting more of it—in the bank.

For the first time since we began taking our poll last May, the active, sophisticated investors who use are almost equally divided between bulls and bears.

Their optimism has plunged since early this year as higher oil prices, a weak economy, and a global financial crisis that just won’t quit have kept stocks in the doldrums.

Some 43% of investors who replied to our survey through Monday, August 4th, say the Standard & Poor’s 500 index will rise by the end of the year. Of those, only 9% are very bullish, believing it will rise 10% or more.

See results here

That contrasts with the 56% who cast their lot with the bulls in May and the 60% who had bullish outlooks in February (see Table). It’s the sharpest decline in investor optimism we’ve ever seen in our poll, and a full 20-percentage point drop in bullishness since last November. Investors' Sentiment Indicator

Meanwhile, the bears are growling louder. Thirty-nine percent of our respondents think the S&P will be lower by the end of the year, and 13% of those are very bearish, i.e., they’re looking for the index to fall at least 10% by December 31st. As the table indicates, it’s a huge jump in pessimism since May and the highest level of bearishness we’ve ever polled.

The fence sitters, those neutral individuals who think stocks will stay steady, was 18%, identical with May’s results.

Our participants have grown more bearish along with other investors, both individual and institutional. But the nearly even split between bulls and bears among the sophisticated investors on who understand that markets have their ups and downs does not look to me like the capitulation many are waiting for before this bear market ends.

Nonetheless, the big change in sentiment is apparently affecting our participants’ investment decisions. Some 13% of them now think cash (certificates of deposit, Treasury bills, money market accounts) will be the best-performing asset class for the rest of the year. That’s up from only 2% in May.

With some cash instruments earning less than 2% now, it only shows how unattractive other asset classes are to a growing number of investors.

Large US stocks, foreign stocks, and even once-hot commodities saw a drop in interest in the latest survey, although a healthy 35% of respondents still view commodities as the most attractive vehicle for the rest of the year. (Maybe the huge decline in key commodities like oil, corn, wheat, and gold over the last few weeks hasn’t quite sunk in yet.)

Interest in foreign stocks have cooled considerably, particularly as many emerging markets had vicious sell-offs.

And large US stocks, which enjoyed a revival in interest last fall, have lost popularity among our users: Only 14% think they will be the best performing asset class for the rest of 2008.

Small- and mid-cap US stocks have made a quiet comeback, however: Some 16% of our participants expect them to perform best between now and December 31st, as at least some of the investors we surveyed may be looking for the beginning of a recovery.

The growing bearishness in our survey likely reflects deeper pessimism about the US economy.

There’s been a small increase—to 21% from 18% in May—in the percentage of people who expect the economy to go into a recession. But we’ve seen a big jump in the number who think economic growth will slow. Nearly half of those we polled now expect that (49%, versus 39% in May), while those hearty souls who look for gross domestic product growth to increase has dropped by 13 percentage points, to 30%.

So, some seven in ten respondents look for a weaker economy for the rest of the year.

And a huge majority, 74%, think inflation will increase between now and December 31st.
That’s a bit lower than the 79% who thought that would happen back in May, but still pretty definitive (and may be why so many of those surveyed still like commodities).

Two-thirds of those surveyed, however, believe chairman Ben Bernanke and the Federal Reserve will keep short-term interest rates steady through year end, and only 28% expect the central bank to raise rates by then. Few look for an interest-rate cut.

And since we’re in the middle of a presidential election, we decided to ask our users who they think will win (not whom they support).

The result: by nearly two to one (49% to 27%), our users believe the likely Democratic nominee, Senator Barack Obama, will defeat Republican Senator John McCain and win the White House. (I don’t think Bill and Hillary participated in this survey!).

Perhaps even more importantly, 78% of the people we surveyed think Democrats will either maintain or extend their majority in both houses of Congress. That could have big implications for fiscal and economic policy in 2009 and affect investors dramatically.

The results of the new Investor Sentiment Indicator are being presented here at the San Francisco Money Show. Some 460 respondents were drawn from’s Investors subscriber list, comprising self-directed individual investors. The maximum margin of error is within 4.4 percentage points of the proportion reported using a 95% confidence level.

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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