Light at the End of the Tunnel?

11/06/2008 1:42 pm EST


Howard Gold

Founder & President, GoldenEgg Investing

Washington, DC—Do I dare say it? Are investors actually getting more bullish?

You'd think people would have forgotten what that word means after what we've been through: a bona fide stock market crash, the worst bear market maybe since the 1970s, and the biggest global financial crisis since the 1930s.

So, it's no small surprise that our new Investor Sentiment Indicator shows an increase in bullishness among the active, sophisticated investors who use our site. The investors we polled also show growing predilection for US stocks over other asset classes.

Maybe they feel that after a more than 40% drop in the major US stock indexes, markets don't have much further to fall. Or maybe it's just the new time period our survey covers—looking forward, for the first time, to the end of 2009—that gives markets more time to recover.

But whatever the reason, a majority of respondents (51%) to our poll, which was completed November 3rd, expects US stocks to be higher by the end of next year. That's up from the 43% in August who said they were bullish about stocks through December 31st of this year (see table).

Of the bulls, 19% look for the Standard & Poor's 500 index to rise 10% or more over the coming 12 months, while 32% think it will gain 10% or less. 

The number of bears has dropped, too, to 29%, from 39% in our August survey. Either people are getting more hopeful or they believe time heals all wounds—even the market's. The undecided voters who are neutral on the market stand at 20%.

You can see the presentation with all the survey's findings here.

Meanwhile, there appears to be a big shift in how people are investing. Commodities remain the most popular asset: Some 28% think it will perform best between now and the end of 2009. Although that's much lower than it has been in recent polls, it's surprising given how complete the collapse in this sector has been.

But when 55% of those surveyed actually expect inflation to increase, there's a certain logic in loading up on this deeply oversold sector.

Yet the real winners in these investors' minds will be US stocks. Large US stocks finished second only to commodities in popularity, as 26% of our respondents choose them as their favorite asset class.

Small stocks have also registered nice gains. They are now cited as likely top performers by 20% of those polled. That's a big change, since they have been out of favor after having racked up big gains from 2000 to 2006. Investors could be looking for them to lead a market recovery, as they tend to outperform when new bull markets begin.

So, altogether 46% of those surveyed pick US stocks as their favorite asset, a tribute perhaps to the relatively strong performance of US markets. How can a 40% decline be strong, you ask? Well, just compare it with China or Russia or even once-hot Brazil. The US may be the epicenter of the financial crisis and we may be taking on more debt than ever to solve it, but the size, depth, and flexibility gives our market a real advantage against overseas alternatives.

Maybe that's why the popularity of foreign stocks has hit an all-time low: Only 6% of those surveyed favor them, down from 24% in May. In this way, our respondents may be reflecting the obvious—or this may be the only sign of true capitulation we're seeing in our poll. Draw your own conclusions.

Meanwhile, among some investors (15% of those we surveyed), cash remains king. And while bonds have increased in favor (to 4%), they remain the most underrated asset around. If we really have deflation, then bonds would be one of the few asset classes that will do well. And anyone who sold in May and went away to the safety of bonds would have saved themselves enormous losses this year.

We also polled investors on some economic and political issues. A plurality (43%) expects the Federal Reserve to keep short-term interest rates where they are now (a federal funds rate of 1%) by the end of next year, while 30% look for the Fed to cut more. To where—zero?

Importantly, almost 45% of those surveyed think the financial crisis will ease in 2009, while 30% expect it to worsen.  Are those the same 30% who expect a (deeper) recession? Or the 29% who are bearish? Not to disparage their opinions, but they seem to have a consistent narrative about the markets. We won't know who's right for at least another year.

There's considerably less optimism on housing, however. Although a bare majority (51%) expects US home prices to stop falling next year, a large number of those polled (41%) looks for housing prices to fall even more in 2009. Since many economists say that the financial crisis won't end until the housing markets stabilize, that's sobering. 

In the days right before the election, we also asked people what they thought would happen to taxes under a new administration. Well, we have our answer, and it's not reassuring: Some 59% of those polled expect the new administration and Congress to raise income taxes on top earners and to boost taxes on dividends and capital gains. Only 8% think taxes will stay where they are now.

That pretty much squares with exit polls taken on Election Day that showed about half of all voters anticipated a tax increase no matter who won.

(Incidentally our users were on target in calling this election. Back in August they predicted by 49% to 27% that Sen. Barack Obama would be elected president, and  78% said Democrats would either keep or extend their control of Congress.)

The results of the new Investor Sentiment Indicator are being presented here at the Washington, DC Money Show. Some 500 respondents were drawn from's Investors subscriber list, comprising self-directed individual investors. The maximum margin of error is within 4.2 percentage points of the proportion reported using a 95% confidence level.

Is this poll a good sign or a bad one? Is there finally light at the end of the tunnel, or should we expect to see more bearishness and despair even among this hearty group of investors before declaring that the bear market has hit bottom?

I'll leave that to other experts—and you—to decide. As for me, I'm glad to see signs of hope somewhere.

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

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