Investment managers are bracing for a difficult second half, according to a quarterly survey conducted by Russell Investments.

The firm said that its research found that managers don’t believe that the economy is entirely out of the woods, nor are they worried that a serious recession is inevitable. In the latest survey, bullishness fell steeply for the classically defensive health care and consumer staples sectors, hinting that caution — not fear — is driving the markets, it said.

Manager bullishness for the health care sector dropped from 71% to 54% from last quarter, and bullishness for the consumer staples sector fell from 47% to 37% over the same time period. For this quarter, manager bullishness fell for a majority of equity sectors, and not one sector moved up more than five percentage points, Russell added.

“The signs point to a classic, persistent, mid-cycle slowdown,” says Erik Ristuben, Russell’s chief investment officer for multi-strategy solutions. “Relatively slow economic growth and muted corporate earnings have dampened manager enthusiasm for the near term, but they remain guardedly optimistic for an economic and market recovery.”

Managers identified a slowing economy as the most significant potential threat to market performance during the second half of 2008, the firm reported. It said 46% saw economic growth as the biggest issue, 40% were watching inflation, and 38% thought both the credit markets and energy costs could still wreak havoc in the markets.

“The good investment managers are always mindful of how and why the road can become rocky, but investors can find comfort in economic indicators that currently are not overly worrisome. Core inflation remains under control, consumers continue to spend and unemployment is relatively low,” says Ristuben. “Managers know the economy and markets are ugly now, but they also know it’s time to put their heads down and grind it out.”

Manager bullishness for non-U.S. developed market equities dropped to a record low of 42%, and for the first time in 12 quarters, non-U.S. developed market equities fell from the top three bullish asset classes, replaced by emerging market equities.

“The shift in bullishness from developed markets to emerging markets is a signal that managers believe the declining value of the dollar may have reached a low point,” says Ristuben. “Much of the recent strength in non-U.S. developed market equities performance has been tied to currency, and that competitive advantage could fade as the Federal Reserve and Treasury Department move to strengthen the dollar.”

Managers remain bullish on large-cap growth stocks, but their enthusiasm for this asset class is waning, Russell said. On a sector basis, technology continues to enjoy the highest bullish rating of any sector or asset class. However, the integrated oils sector had a significant decrease, falling 12 percentage points to 43% manager bullishness. Manager bullishness for other energy also slipped, albeit less dramatically.

“Managers appear to believe the run-up in integrated oils and other energy is overdone,” says Ristuben. “Many prominent economists are at a loss to explain the sharp rise in oil prices, and managers may be taking note.”