Investors Jump Back Into the Pool

05/14/2009 1:30 pm EST


Howard Gold

Founder & President, GoldenEgg Investing

Las Vegas, NV-Have investors become believers again?

That's what the results of our latest Investor Sentiment indicator suggest. The poll, concluded late last week, registered its strongest bullish readings in a year. 

Some 57% of the active, sophisticated investors we polled expect the Standard & Poor's 500 index to close higher by the end of the year. Of those, fully 26% think it will be more than 10% higher than it is now-the highest "very bullish" rating we've ever recorded in our two-year-old survey (see the full results here).

Meanwhile, the ranks of the bears are shrinking: Only 28% think the market will be lower by the end of 2009, the smallest percentage in a year (see table). There's nothing like a stock market rally to quiet the bears' growling!


But the shift in sentiment was almost tangible here at The MoneyShow Las Vegas in the Mandalay Bay Resort. While temperatures outside hit the high 90s, investors packed the air-conditioned ballrooms and exhibit halls in search of new strategies and investment ideas. The attendees and speakers I met seemed more energized and, dare I say, even hopeful, than they had been in a long time. That was a welcome relief from the unrelenting gloom that has pervaded the investment community until very recently.

Yet though their hearts are bullish, their brains haven't caught up yet: A small number thinks the market hit bottom in March and that we're in a new bull market now.

And overwhelming majorities don't expect the housing market to bottom and the current recession to end until at least 2010. That's a long way away.

Meanwhile, they're very, very worried about inflation. No wonder commodities ranked as their favorite asset class:  Some 38% expect commodities to perform the best through the end of the year, while small and mid-cap US stocks ranked second, at 24%. Smaller stocks have risen steadily in popularity in our polls since last year, and the Russell 2000 small cap index has handily beaten the S&P since the March lows.

Our investors' increased optimism reflects a general mood that the very worst is over and that we may indeed be starting a new bull. In recent weeks, formerly bearish advisers with good long-term track records have now embraced their inner bull.

But some findings in our survey should give us pause-or may reflect the schizoid thinking of investors dealing with a major transition in the markets.

More than half-52%-look for the current recession to end some time in 2010, while another 32% expect it to end after 2010.  So, an overwhelming 84% of those polled reject the hopeful scenario put forth by Federal Reserve chairman Ben Bernanke and others that the US economy will begin to recover late this year.

So, if the stock market anticipates developments in the economy by six months or so, how does a bullish outlook for stocks gibe with such a grim prognosis for the economy? Well, it really doesn't.

Our respondents were equally pessimistic about the US housing market, despite some signs of improvement in shell-shocked areas like California, Arizona, and here in Nevada. Speculators and first-time buyers are swooping in to buy foreclosed homes and other properties at deep discounts-a necessary precondition for these markets' ultimate recovery.

Yet the investors we surveyed don't look for the US housing market to bottom out until at least next year. Forty-five percent of those polled expect it to happen some time in 2010, and another 25% think it won't take place until after 2010. That's almost as much negativity as we found about the economy.

And yet a substantial plurality of the people we surveyed is haunted by the specter of inflation: 45% think it will increase this year, while 43% look for it to remain constant. Only a handful sees deflation as a threat.

There is no inflation now, but that's little comfort for this audience, who remember the bad old days of the 1970s, when inflation and slow growth melded into the monster of stagflation, the worst of both worlds for investors.

Maybe that's why they're not quite ready to become born-again bulls: Only 19% think we're in a new bull market, while some 37%-nearly twice as many-see this as a bear market rally and say stocks will eventually make new lows. Forty-four percent believe this is a volatile market that won't make big moves either way for a while. We'll have to wait for the market itself to settle that issue.

The results of the new Investor Sentiment Indicator were presented here at The MoneyShow Las Vegas. Some 742 respondents from's Investors subscriber list, comprising self-directed individual investors, were polled between May 4th and May 7th. The maximum margin of error is within 3.46 percentage points of the proportion reported using a 95% confidence level.

The investors who answered our survey and attended this show are saying no, the world hasn't ended. And things do appear to be getting worse less quickly. That's admittedly a thin reed on which to build a bull market, but it's all we've got right now, and investors have accepted it in an act of faith. Hey, it's a lot better than despair.

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

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