Investors Run for Cover

08/20/2009 1:07 pm EST


Howard Gold

Founder & President, GoldenEgg Investing

San Francisco—It must be the weather that’s causing all this newfound caution among investors.

Here in San Francisco, it's a bit chilly, but the Northeast and Pacific Northwest are sweltering in August’s dog days. Hurricane Bill is moving slowly through the Atlantic, while in the American heartland, they’re battening down the hatches against an onslaught of tornadoes. And in New York, torrential rain and hail knocked down big trees, smashing cars and closing roads.

It must be a sign. At least that’s how investors are taking it.

Following a big run-up that drove the Standard & Poor’s 500 index up nearly 50% from its March 9th end-of-the-world lows, the investors we polled in our latest Investor Sentiment Indicator were notably more cautious than they were the last time we surveyed them in May.

Then, some 57% of investors we queried declared themselves bullish: They expected the S&P 500 to close higher on December 31st. Now, they’re more wary. This week, only 48% of the active, self-directed investors we poll expect the market to close 2009 higher.

Of course, there’s less time left for that to happen now and the S&P is up about 11% since our May poll, but this is the lowest level of bullishness we’ve seen since February, when only 47% were willing to stick their necks out for stocks. And you all remember what happened after that.

Digging even deeper into the data, we find that even the bulls are less bullish (see Table). A mere 10% put themselves in the “very bullish” camp—that is, they expect the S&P to rise more than 10% by year-end. The rest, 38%, are looking for a tepid single-digit percentage rise. That’s barely bullish at all.

Click to Enlarge

Meanwhile, the long-suffering bears are getting bolder and gaining recruits. Thirty-four percent of our respondents now live under the constellations Ursa Major or Ursa Minor, the most since February. They must have been born under an unlucky star.

Overall, the investors who answered our survey aren’t terribly optimistic about the economy that underpins the stock market, either.

They’re not buying all the happy talk that the recession is already over; only 7% believe that. In fact, some three out of four don’t expect it to end until next year or even later, much more dour than the predictions of most economists, whatever they’re worth.

Similarly, they’re not ready to join Realtors’ “this-is-the-best-time-ever-to-buy-a-home” mantra:  Fewer than 7% think the housing market has bottomed; a stunning 80% don’t look for that to happen until next year or later.

Not exactly a strong foundation for a new bull.

And our respondents don’t think we’re in one: A majority, 52%, says we’re in a volatile market that won’t make big moves either way for a while. Only 16% think we saw a real bottom in March and that this is a new bull market.

The results of the new Investor Sentiment Indicator will be presented here at the San Francisco MoneyShow. Some 767 respondents from's Investors subscriber list—the most ever—were polled between August 13th and August 19th. The maximum margin of error is within 3.41 percentage points of the proportion reported using a 95% confidence level.

So, what are these investors buying? Well, foreign stocks have made a big comeback: 24% of the investors said they would be the best-performing asset class between now and December 31st.

And no wonder: With the miserable economy they foresee here, investors are looking for big returns overseas. But as I write this, emerging markets are having troubles of their own: The Shanghai Composite index has fallen by 20% off its recent peak, after having nearly doubled since last November.

Still, the 24% is a big jump from the mere 2% who favored international markets in February. (Now, that was the time to buy!) Overseas stocks are also the most popular class of equities, topping the 19% who prefer small- and mid-cap US stocks and the even smaller number who like the big blue chips.

Cash is still popular with 7%, but bonds get the votes of only 6%, while nobody likes real estate: Only 2% of our respondents say it will be the top asset class through the end of the year, even though it has been one of the best performing groups since the bottom of the bear in March.

But our investors have a real gleam in their eye for commodities, which has been the most popular asset class in the last five surveys. Some 32% gave it the nod this time, despite their gloomy view of the economy and housing.

Fear of inflation may be behind their love of hard assets, which have rallied nicely but remain very vulnerable in the recessionary economy our users anticipate (and I suspect if we polled more closely, a lot of the enthusiasm for commodities would be focused on gold). A majority, 52%, looks for inflation to remain constant this year, but another 36%—about the same number who like commodities—expect it to rise. Fewer than 15% see disinflation or deflation on the horizon.

But they do see health care reform coming, which might be a surprise to President Obama and his team, who have taken some big hits on the issue in recent weeks. A solid majority, 56%, expects Congress to pass some kind of health care reform this year, although I think that whatever bill ultimately emerges will leave everyone angry and disappointed—and the president will sign it anyway. Isn’t that how it always happens?

And finally, an overwhelming 82% of our investors expect federal and state taxes to rise significantly over the next year or two, as we predicted earlier this year.
You can board up your windows against a Nor'easter, evacuate from an approaching hurricane, or get in the storm shelter when you spot a twister. But it’s pretty tough to hide from the Tax Tornado—yet another reason our investors may be running for cover.

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

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on MARKETS