Active investors bullish on stocks, worry about inflation

June 29, 2011

Do active investors know something the rest of us don’t? Despite the recent barrage of humbling economic data and a substantial stock slide, investors making three or more trades a month are bullish on the market, predicting the Standard & Poor’s 500 Index will finish above the threshold of 1,400 by the end of 2011.

Fifty-one percent of the nearly 700 retail investors surveyed believe the S&P will rise more than 100 points, according to a new survey by Fidelity Investments. More than half (51 percent) say they beat the market in the past 12 months, while another 27 percent say they matched it. The S&P 500 Index rose more than 19 percent during this time period.

Not all investors are so confident. Among those with $500,000 or more in investable assets, excluding their primary residence, confidence fell 11 points in June representing the largest monthly decline in more than three years, according to the Affluent Investor Confidence Index released by Spectrum Group.

And according to State Street, global institutional investor confidence also fell in June, led by a decline in optimism among North American investors.

What’s driving the pessimism among the wealthy crowd? “Their specific attitude or outlook is concern about household income, concern about the health of where they work — their corporations, their employers or their own company — that’s all related to the economy and their concerns about the economy as a whole,” says George Walper, president of Chicago-based Spectrum Group.

Franklin Gold, senior vice president of research and education at Fidelity, says that active investor optimism is tempered by a general concern over economic conditions as well.

“They clearly are concerned and are watching out for inflation. They’re watching what goes on Europe, but overall they’re just maintaining a general positive overview. Even though their confidence may be down from an investing perspective, they’re still mildly positive in terms of direction,” Gold says.

Among Fidelity’s other findings:

  • 60 percent say they will put their investing dollars into equities.
  • 36 percent believe the energy sector will post strong gains in the next six months. Of those already invested in oil, 80 percent say they increased their allocation.
  • 22 percent believe the healthcare sector will be the best performer.

Sixty-two percent of respondents say they will avoid investing in the financial sector, which may be a knee-jerk reaction to negative media attention, Gold says. “If you look at what’s talked about a lot in the press, I think those are the types of things you see stories on all the time and investors are likely reflecting what they’re seeing,” he says.

In addition to worries over the financial sector, active investors are also keeping a sharp eye on inflation with nearly 9 out of 10 investors (89 percent) saying they expect their concerns to accelerate.

Investors will make a shift to foreign assets (29 percent) and increase their allocations in precious metals (31 percent) to hedge against rising prices. Of those already invested in precious metals, 78 percent say they will increase their holdings within the next six months.

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