More Cautious and More Independent

02/05/2009 1:24 pm EST


Howard Gold

Founder & President, GoldenEgg Investing

Orlando, FL—Hope springs eternal, even in dark times like these.

The active, sophisticated investors we polled in our latest Investor Sentiment indicator are still largely bullish about the markets this year.

But they have turned slightly more cautious and are deeply pessimistic about the prospects for the economy.

Meanwhile, the worst bear market in a generation gave them a massive real-world risk tolerance test, and spurred them to take more control of their own finances. That level of interest was reflected in our poll, which got the biggest response ever since its launch nearly two years ago. The survey was completed February 2nd.

The verdict: Some 47% expect US stocks to be higher by the end of next year. That's slightly less than the 51% in November who said they were bullish about stocks through December 31st of this year (see table).

Of the bulls, 17% look for the Standard & Poor's 500 index to rise 10% or more in 2009, while 30% think it will gain 10% or less. 

Reflecting the greater caution of active investors, the percentage of bears has risen, too, to 34%, from 29% in our November survey. About 19% of respondents think the market will end the year about where it is now—about in line with neutral readings in previous surveys.

The results of the new Investor Sentiment Indicator were presented here Wednesday at the World Money Show. Some 670 respondents were drawn from's Investors subscriber list, comprising self-directed individual investors. The maximum margin of error is within 3.58 percentage points of the proportion reported using a 95% confidence level.

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

Meanwhile, the stock market's ups and downs have taken their toll on investors' preferences. Commodities have seen a huge jump in investor interest—some 39% of those surveyed think they'll be the best performing asset class in 2009, a jump of some 11 percentage points since November.

Although inflationary expectations are ebbing among this group (42% expect it to increase this year, vs. 55% in November), more than three-quarters look for it to either increase or stay the same—and only 11% foresee actual deflation in 2009. Clearly, inflation is a big worry among investors, so perhaps they think commodities will give them extra protection.

Yet their interest in stocks appears to be ebbing.

Back in November, some 46% of those surveyed picked US stocks as their favorite asset, a tribute perhaps to the "less bad" performance of US markets.

But while small stocks maintained their popularity—some 19% of those surveyed picked them to perform best—only 15% of those surveyed like the blue-chip US household names. That's down 11 percentage points since November, a huge fall-off.

Why? Maybe it's this group's negative outlook on the economy. Nearly half—49%—look for the current recession to end some time in 2010, while another 28% expect it to end after 2010.

So, more than three-quarters believe the economy won't turn the corner until well into next year. That explains the bigger interest in bonds in this survey—10% of investors favor them (8% corporate, 2% Treasuries) vs. only 4% in November—and the lingering allure of cash (12% prefer it now, off a bit since November).

It also explains why they're avoiding foreign stocks like the plague, as the dollar has strengthened and overseas economies may be in even worse shape than our own. Only 2% of those who answered our poll think foreign stocks will be the best performers in 2009, the lowest ever and way off their glory days of last year, when they ranked among the most popular.

Last time, I wrote that the unpopularity of international stocks "may be the only sign of true capitulation we're seeing in our poll." Now I'd say that for contrarian investors who want more exposure to stocks, this is probably the best place to look.

But I do have one question for the bullish investors in our survey: If you think overwhelmingly that the recession won't end until at least next year, why do you believe stocks will perform so well in 2009? The rest of us might ponder that, too.

And we should also ponder our own reactions to the market catastrophe we experienced last year, a trial by fire for even the most steadfast investors. Only one out of every four polled this time say they bought more stock during the 2008 market meltdown. Some 38% of our respondents stayed put, while 36% admitted to having sold stocks and gone into cash. Only 2% put their money in the mattress.

It appears that when the going gets tough, many of us aren't as tough as we think we are.

Another surprising conclusion: Individual stocks remain by far the preferred vehicle for active investors, with a comfortable majority (55%) favoring them. Exchange traded funds (ETFs) were a distant second, getting the support of 21% of those polled. Mutual funds and futures and options lagged, with 12% each.

But to me the most encouraging response in the survey came in response to a question about how people are managing their own money. The Bernie Madoff scandal triggered a crisis of confidence among investors, who have reappraised the way they manage their finances.

The people who answered our survey showed little enthusiasm for shuffling the deck. Instead, 44% are keeping things as they are—at least as far as their advisers are concerned.

But 50% of those we polled said they planned to take more control of their own finances. That may be the healthiest development from the horrible year we just had, and an absolute necessity in the environment we live in.

All has changed, changed utterly, the poet W.B. Yeats once wrote. Investors have learned that the hard way.

Howard R. Gold is executive editor of The opinions expressed here are his own.

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