No Capitulation Here

10/16/2008 3:00 pm EST


Howard Gold

Founder & President, GoldenEgg Investing

Chicago—OK, everyone, I’d like a show of hands: any bulls left out there?

After the collapse of several venerable financial firms, a stock market crash that rivals 1987 or 1929, and growing signs of a global recession, you’d think they’d be as hard to find as cats in a dog pound.

But maybe you haven’t met some of the financial advisors who answered our latest advisor sentiment survey.

The people who advise increasingly jittery investors on Main Street USA are actually looking on the bright side—or at least they’re not caving in to the gloom and doom.

Nearly half of them (47%) expect to see higher stock prices by the end of the year.  That’s down from the 62% who thought we’d see higher prices back in the innocent days of April.

But it’s also above the 43% of individual investors who were bullish or very bullish in our last survey in August. We will be taking the pulse of’s active individual investors again next month. As the market has plunged over the past few months, so has investors’ optimism (see Table).

Meanwhile, 37% of the advisors polled describe themselves as bearish or very bearish—down slightly from the 39% of individuals who were bearish in August and the 23% of FAs who back in April said the Standard & Poor’s 500 index would be lower by the end of the year.

The undecided voters who think stocks will stay about where they are amounted to 16%, just about where it was in previous surveys. Maybe these are the same people.

What’s behind these results? First of all, the survey looks out only toward the end of 2008, which is just two and a half months away. And although the market is likely to have big swings in either direction, it’s been beaten down a lot. To some people, 900 on the S&P looks like a buying opportunity.

Also, the survey sample was smaller than what we usually get from individual investors, so participation may have been higher among the more committed (i.e., bullish) advisors.

But the main reason may be what I’ve found interviewing people and attending seminars here at the Financial Advisors Symposium. These are long-range thinkers interested in growing and preserving clients’ assets for decades. They’re not traders or market timers, and they’re well aware of the risk that’s not being talked about these days—loss of purchasing power because of inflation. And over time, only investing in stocks has overcome that.

Having said that, commodities remain the most popular asset class, after a nasty selloff that has pushed many of them deep into bear market territory.

Some 32% of advisors say hard assets will perform the best through December 31st, with large US stocks close behind. Foreign stocks, the superstars of the market through last year, have plunged into the single digits as emerging markets have declined much more dramatically than the US.

Bonds have seen a huge jump in popularity (some 11% think they will be the best performing asset for the rest of the year, up from low single-digit ranges in all our previous surveys) as the flight to safety causes investors to take another look at this much-neglected asset class. Cash, however, remains trash to many of our advisors.

The greater caution we’ve seen in this survey no doubt reflects worries about the economy.

The number of respondents who expect the US to go into a recession has shot up dramatically, to 37%, while another 47% think GDP growth will go down. So 84% are looking for a weaker economy in the near future. (For all the results of the survey, click here.)

So, it’s no surprise fears about inflation have dropped off. Some 20% look for it to decrease while another 43% think price increases will stay about where they are. Deflation isn’t on the radar screen.

The steep decline in concerns about inflation give more room for Federal Reserve chairman Ben Bernanke to cut short-term interest rates again, from their current 1 ½%. More than two-thirds of our respondents look for that to happen.

Obviously it would be helpful to see more people in outright despair to get the capitulation that signals a market bottom—and maybe the lack of that is significant. But these advisors are not capitulators, and if they’ve managed to get through what we’ve all experienced the last few weeks, maybe that tells us something, too.

The Financial Advisor Sentiment Indicator was compiled from 148 respondents who answered our survey from October 3rd—9th. The maximum margin of error is within +/- 7.9 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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