Investors Seek Cover as Bears Emerge

09/06/2011 11:00 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The latest MoneyShow sentiment survey succumbs to the gloom, though many still expect modest gains for stocks in the next year, writes senior editor Igor Greenwald.

Faced with a deteriorating economy and slumping stock markets, most active investors think the bull market that began in 2009 has run its course.

But a surprising 45% of those surveyed for the latest MoneyShow Sentiment Indicator still expect the S&P 500 index to rise over the next year. The survey of 818 investor members was conducted August 22-26.

US large-cap stocks garnered unprecedented support as the most promising asset class at a time of high unemployment, modest inflation and continuing accommodation by the Federal Reserve.

Large caps were tabbed the favored destination for new money by 32% of those planning to invest this year, the most support they have garnered in the survey’s five-year history. That was nearly double the fan base of the next most popular asset class, precious metals, despite the fact that gold and silver have handily outperformed blue chips over the last year and last decade.

In contrast, US small caps and midcaps, as well as developed and emerging international markets, have lost many adherents since the last survey in May. The two overseas categories are now barely more popular than corporate bonds, which were favored by 7% of the respondents, up from 3% in May.

The preference for the cash-rich balance sheets of US multinationals over the domestic smaller fry and foreign rivals likely reflects jitters over the financial crisis in Europe and rate hikes in China, India, Brazil, and other key emerging markets.

But it is no vote of confidence in the longer-term trend for equities, with 35% of those surveyed convinced that the gains of 2009-2010 will ultimately give way to new bear-market lows. Such pessimists now outnumber those who believe the bull market will survive by a ratio of 4:1, whereas three months earlier there were two big-picture bulls for every bear.

No wonder nearly a quarter of the respondents have more than half of their portfolio in cash. That’s up from 16% three months earlier.

Back in May, a quarter of the investors surveyed believed the unemployment rate would fall below 8% by the year’s end. Now such optimists are down to 6%, whereas 56% expect no progress, at best, from the current 9.1% unemployment rate.

The percentage of investors expecting a housing bottom by the year’s end is down to 16%, from 31% in May.

Given the lack of progress on hiring or housing and the recent moderation in gas prices, it might seem surprising that 30% still expect inflation to exceed 3% over the next 12 months. But that’s down from 44% in May.

Back then, fewer than 9% thought inflation might hold steady or diminish. Now that figure stands at 25%, including the 1% who fear deflation beckons.

If there’s a silver lining in these economic thunderheads, it’s the spreading belief that the Federal Reserve will do even more to spur growth. The Fed will continue with negligible interest rates, and will either retain its balance sheet or add to it with further asset purchases, according to 59% of the investors surveyed.

Just 5% believe the Fed will raise rates over the next year, down from 41% three months earlier.

Of course, some investors appear convinced the Fed has hurt more than it’s helped. Their discontent has turned the central bank into a political lightning rod. But holding onto one of those in the brewing storm seems preferable to grasping at straws. 

 See the complete results from the MoneyShow Sentiment Indicator here…

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