MoneyShow Sentiment Indicator Soars

02/22/2011 12:46 pm EST

Focus: MARKETS

The investing world’s best and brightest are increasingly optimistic about their chances in the markets—but not so much for the country’s economy, our new survey finds.

By Richard Jenkins
MoneyShow.com

It’s probably no surprise to anyone that sophisticated investors are dramatically more bullish now than they were six months or a year ago.

What’s a little shocking, though, is how much cash is still parked on the sidelines, according to the latest MoneyShow Sentiment Indicator survey. (See the complete survey results here.)

Of the 1,068 investors who responded to the e-mail survey, 33% said they believed the United States was in a new bull market—not a bear market rally—and would not revisit the lows of March 2009. In a similar survey last August, only 8% of those responding expressed that belief. And 24% predicted that the S&P 500 would rise by 10% or more over the next 12 months, up from 7% last August.

Even more striking, a separate poll of 49 financial experts who regularly speak at the MoneyShow tradeshows found that 53% believe a new bull market has begun—and 43% expect the S&P 500 to rise at least 10% over the next year.

The survey, conducted Jan. 31-Feb. 4, also found that nearly half of the respondents still had 20% or more of their portfolio value in cash or cash equivalents, which could help fuel a further market advance. And one-sixth reported being 50% or more in cash.

Experts See Markets Leading Recovery
On the glass-half-empty side, investors weren’t nearly so optimistic about the economy. A majority expect the unemployment rate to end the year between 8% and 9%; while nearly a third expect a rate above 9%. And nearly two-thirds don’t foresee a bottom for home prices occurring this year; a mere 10% think we’ve already seen the low point.

Investors’ economic pessimism dovetails with their expectations for moderate inflation, with 56% expecting the Consumer Price Index to remain between 1% and 3% over the next 12 months. However, 30% are looking for the CPI to rise above 3%.

Inflation expectations strongly influence expectations for the price of gold, so it’s not surprising that 30% of respondents also believe that gold prices will end the year at $1,500 an ounce or above—a minimum increase of 8% from current prices.

When asked how they expect the Federal Reserve to respond to economic these conditions in the year ahead, investors were almost evenly divided: a plurality of 41% expect the Fed to keep rates steady and wind down monetary stimulus (known as QE2). However, 29.5% said the Fed will raise rates and end the stimulus, while an equal number said exactly the opposite, that the Fed would continue QE2 and keep rates at rock bottom.

Against this backdrop, where are investors putting their money? We asked specifically where they would invest new money in the market, and here’s what they said:

Asset Class

Percent

Large-cap U.S. stocks

30.66%

Small- or mid-cap U.S. stocks

20.37%

Precious metals (gold and silver)

13.61%

Other commodities

13.42%

Emerging market stocks

9.11%

Developed market international stocks

5.48%

Real estate, including REITs

3.62%

Corporate bonds (including high yield)

3.23%

Treasury bonds (long term)

0.49%

US stocks were strongly favored after many years of underperforming foreign markets, especially those of developing economies. Plans to buy precious metals fell from 32% a year ago to just 14% in the most recent survey, although interest in other commodities increased from 6% to 13%. Given the recent performance of agricultural products and, to a lesser extent, energy, that’s not surprising.

How can you use this information in your own investing? Some regard these kinds of surveys as a contrary indicator: if individuals are bullish, it’s time to sell. Last August, for example, the survey recorded unprecedented bearishness, and the market has since risen 14.5%.

Are we overdue for a correction? There’s no question that we’re in the late stages of this most recent rally and that a decline in prices of 5% to 10% would be healthy for the market. But with the amount of cash still sitting on the sidelines, an economy in the early stages of recovery and continued pessimism about real estate, there’s still plenty of reason to believe that stocks will end of the year 5% to 10% ahead of where we are today.

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