(August 24) – “Wall Street’s brightest didn’t look that way when they advised investors on the best place for their money in a troubled spring for stocks,” writes Terzah Ewing in today’s Wall Street Journal.

“In the second quarter, stocks underperformed both bonds and cash even as Wall Street continued to urge investors to put most of their assets in stocks, according to The Wall Street Journal’s latest survey of the asset-allocation decisions of major brokerage firms. Many small investors already learned this the hard way.”

“Now the questions arise: Will a heavy helping of the long-stodgy categories of bonds and cash continue to serve investors better than stocks? Or will stocks return to their accustomed role as investment winners?”

“Most brokerage-firm strategists continue to believe that stocks are the long-term way to go. Among them is Merrill Lynch & Co.’s new U.S. investment strategist, Christine Callies, who earlier this month cut the firm’s bond allocation to 30% from 35% and boosted its stock allocation to 55% from 50%.”

“In a research note announcing the change, she said she’d also consider lowering the 15% cash component and upping stocks again ‘if the “Goldilocks” economy avoids either an overshoot or an undershoot in coming months.’ “

“As for bonds and cash, she wrote, ‘There have been only a few environments in which a fully defensive posture in equities vs. bonds or cash has been appropriate’ and ‘those environments are usually defined by rapidly rising interest rates,’ which she doesn’t expect to see. Ms. Callies joined Merrill earlier this year from Credit Suisse Group’s Credit Suisse First Boston, where she was head strategist.”

“Abby Joseph Cohen of Goldman Sachs Group Inc., whose blend now puts her first among the firms in terms of one-year returns and second over five years, says in an interview: ‘The rest of the year is one in which I think equities will generate returns that will make investors more comfortable.’ “

“And Jeffrey Applegate, Lehman Brothers Holdings Inc.’s bullish strategist, says, ‘Our call is that we’re still in the same bull market that got under way in October 1990.’ “