Steady as She Goes

05/11/2010 4:00 pm EST


Howard Gold

Founder & President, GoldenEgg Investing

Las Vegas, Nev.—Markets rise and markets fall, but smart investors stick to their guns.

That’s what we’ve learned from our latest Investor Sentiment survey.

Concluded last Friday, during some of the biggest market turmoil we’ve seen since the dark days of early 2009, the poll showed remarkable calm among the active, sophisticated investors who use

The amount of bullishness was about the same as it was back in February, when our most recent survey was taken—near the end of the last correction prompted by fears about Greece’s default.

In fact, it has stayed remarkably constant over the last year or so. Even though the investors we survey are pretty glum about the market and the economy, they are not putting their money where their minds are, but are instead staying the course.

Some 47% of the users who answered our survey from Tuesday, May 4th through Friday, May 7th—a time when global markets appeared to be in a free fall—said they thought the Standard & Poor’s 500 index would be higher by the end of 2010. That was a decline of only two percentage points since February, when bullish sentiment stood at 49%.

The market turmoil, however, must have jangled some investors’ nerves as the percentage of bears—those who expect the S&P 500 to close lower by December 31st—jumped four percentage points, to 36%, higher even than it was in February 2009, just a month before the market bottomed around S&P 666.

But though their outlook has been fairly constant, their favorite asset classes have often shifted dramatically.

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Gold is the “flavor of the month” in the most recent survey: Some 30% of our respondents picked it and other precious metals as the asset class they thought would perform best between now and the end of the year.

The yellow metal has just topped $1,200 an ounce again, and its performance has tracked the S&P for the last year—although it has left the benchmark index in the dust for the past two and five years.

The popularity of gold and other precious metals is clearly tied to our users’ strong belief that inflation will start rising again this year—a clear majority of 54% believes that, while another 39% thinks it will remain constant. There are few believers in the deflation scenario.

Other favorite asset classes: small- or mid-cap US stocks (preferred by 18%), large-cap US stocks (16%), and emerging market stocks (13%).

Developed-market international stocks got little support, only 3%—not surprising when you think about stagnant Japan and a Europe in financial turmoil. That’s a huge reversal from February when, probably buoyed by markets like Canada and Australia, they were the most popular asset class.

Nor did real estate investment trusts (REITs), US Treasury and corporate bonds, and cash command much enthusiasm.

The results of the new Investor Sentiment Indicator were presented here at the Las Vegas MoneyShow. Some 892 respondents from's Investors subscriber list were polled between May 4th and May 7th. The maximum margin of error is within 3.27 percentage points of the proportion reported using a 95% confidence level.

You can view the PowerPoint with all the findings here.

Next: Investors’ views of the economy


But although the investors who answered our survey are bullish for now, they’re very worried about the future, and their views of the economy are downright dismal.

Right now, a whopping 77% of our respondents doesn’t think the economy is out of recession yet (although it’s unclear what their definition of recession is), and an even bigger percentage—84%—doesn’t believe the housing market has bottomed yet.

Nonetheless, there’s been a notable increase in optimism on the economy: Some 23% of our users now think the recession is over, vs. only 16% in February. Three consecutive quarters of gross domestic product growth and four straight months of employment growth was clearly enough to change some people’s minds.

Count me with the 23%. It’s over, baby. As for housing, it really depends where you live, but there have been clear signs of bottoming there as well.

Meanwhile, only 16% of the people we surveyed actually think we’re in a new bull market, making this officially “the market no one believes in.”

A clear majority, 54%, calls this a rally in a bear market that will eventually make new lows, while 30% thinks we’re in a big trading range that will be marked by volatility both ways.

About three-quarters of the respondents—roughly the same number as last time—think the Federal Reserve will keep interest rates steady, while only 24% are looking for it to hike rates.

On the political front, an overwhelming 86% expects a financial reform bill to pass this year. They don’t expect that good news for the Obama administration to translate into victory this November, however: Nearly half of the users we surveyed look for Democrats to lose control of at least one house of Congress during the midterm elections.

Markets rise and fall and elections come and go, but investors still need to plan for the future, and I’m very heartened by what I found in that area.

Users we polled mostly stuck it out during the worst bear market in decades. Only 16% of our respondents admit selling stocks (or mutual funds or ETFs) near the market bottom, while a similar percentage boasted of having bought then. (I suspect the former group was somewhat bigger and the latter a tad smaller.)

But one-third continued to buy throughout the bear market and subsequent rally while another third didn’t buy but didn’t sell. Think about it: 16, 34, 33, 17—nearly a perfect bell curve!

The main point is that more than 80% of our users got it right: If they didn’t keep buying, they at least didn’t sell, and now many of our portfolios are pretty much back to even.

After the kind of market we’ve been through, that’s just amazing.

So, here’s the deal: You can be as pessimistic as you’d like about the markets, our economy, and our government—and you’d often have good reason.

But when it comes to investing, you should think like Blaise Pascal, the great French philosopher and originator of Pascal’s wager: We cannot determine by reason whether God exists or not, he said, but we’re better off behaving as if He did.

The same is true of markets, although the rewards for believing are likely to be in this life rather than in the world to come.

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

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