Investors Remain Cautiously Optimistic

05/13/2011 5:11 pm EST

Focus: MARKETS

Our survey finds that while investors are bullish about the markets, they are more cautious than they were at the beginning of the year, as they stockpile cash and invest mostly in “safer” stocks and commodities, writes MoneyShow Investing Managing Editor Nikhil Hutheesing.

LAS VEGAS—Even being in the Entertainment Capital of the World couldn’t make investors reckless with their money this week.

At the opulent Caesars Palace Hotel on Las Vegas Boulevard, the MoneyShow revealed the results of its latest Investment Sentiment Indicator survey, as it kicked off four days of seminars, workshops, and panel discussions offering investors smart advice from the nation's leading investment advisors.

While many of the attendees headed for the casinos at the end of the day, they also realized from the survey that while most investors are still bullish about the markets, it may be prudent to be cautious with their investments this year.

More than 55% of investors polled in the latest MoneyShow Sentiment Indicator survey expect the market to continue rising this year. But only 26% believe that a new bull market has started since stocks hit bottom in March 2009. That’s down from 33% in our February survey. (Read the complete May survey results here.)

The results are not all that surprising. Americans are roiling from rising gas prices, high unemployment rates, the specter of rising interest rates, and inflation. At the same time, they have watched the value of their homes erode, and there is no clear sign that housing has hit bottom yet.

Adding to the uncertainty are “black swan” events—unexpected, highly improbable events, such as the earthquake, tsunami, and nuclear plant damage in Japan, and the uprisings in Tunisia that then spread to Egypt, Libya, and across the Middle East.

Investors Are Hoarding Cash
That’s one reason why 61% of the 787 investors who responded to the survey between May 2 and May 6 believe that while the market will remain volatile, it will trade in a relatively narrow range for the foreseeable future—not making any major moves in either direction.

Given the expectation that stocks will not generate significant returns this year, many investors are waiting on the sidelines and keeping a greater percentage of their portfolios in cash. In fact, more than 60% of respondents said that up to 50% of their investment assets are being safely held in cash and cash equivalents.

Those who are putting funds back into the market say they expect to stay mostly in safer, large-cap stocks, followed by small- or mid-cap stocks—all US equities, which far outnumbered emerging-market stocks among the investors surveyed—and precious metals, such as silver and gold:

Item Count %
Large-cap US stocks 195 26.53%
Small- or mid-cap US Stocks 138 18.78%
Precious metals (gold and silver) 108 14.69%
Other commodities 87 11.84%
Developed market international stocks 68 9.25%
Emerging market stocks 68 9.25%
Real Estate, including REITs 43 5.85%
Corporate Bonds (including high yield) 23 3.13%
Treasury Bonds (long term) 5 0.68%

NEXT: Housing Won’t Hit Bottom This Year

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Housing Won’t Hit Bottom This Year
There is an argument to be made that with so much cash on the sidelines, investors could decide to get back into the markets as the economy improves—providing fuel to stocks.

Jim O’Neill, the chairman of Goldman Sachs Asset Management, has been saying recently that investors need to stop stockpiling cash and instead invest in the market. He sees a global rally in stocks coming, spearheaded from China.

But it doesn’t look as if that rally will happen this year. According to the MoneyShow Sentiment Indicator, more than half of respondents expect the unemployment rate to remain high, ending the year between 8% and 9%, while nearly a fifth expect unemployment to rise above 9%—which would be ominous for the markets.

As for the housing market, investors do not think that there will be a turnaround soon. More than 70% of those surveyed say that there won’t be a bottom in home prices this year—while only 9% think we have already seen the lows for housing.

And what about inflation? Its coming: About 47% expect the Consumer Price Index to remain between 1% and 3% over the next 12 months, but 44% are looking for the CPI to rise above 3%.

Will Gold Hit $2,000?
The silver lining could be in gold—and other precious metals. While many gold analysts expect the yellow metal to hit $3,000 an ounce this year, 66% of investors surveyed believe that gold will end the year between $1,501 and $2,000 an ounce. If gold reaches the high end, that would be a 33% increase from current levels.

While it’s not clear if the Federal Reserve intends to take further action to bolster the economy—Fed Chairman Ben Bernanke recently made it clear that he thinks the economy is just fine— 41% of investors expect the Fed to raise rates and wind down monetary stimulus, while 39% say the Fed will keep rates steady and end the stimulus.

Investors Need to Protect their Portfolios
What investors need to understand from the survey is that volatility will be the name of the game in the markets for some time to come, so they must take steps to protect their investments.

How so? For at least the rest of this year, it would be prudent to make “safer” investments, perhaps in large-cap stocks and precious metals. Investors also need to be carefully watching the economic indicators, and ensuring that their portfolios are well diversified—among both sectors and global markets.

And with the very real prospect of inflation, it’s smart to own some inflation-protected bonds as well.

Read the complete survey results here.

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