Economy

U.S. Investors Optimistic About Longer Term

by Dennis Jacobe, Chief Economist

Slightly optimistic about personal portfolios; highly pessimistic about economy

PRINCETON, NJ -- Not surprisingly, American investors -- defined as those having $10,000 or more of investable assets -- remain highly pessimistic about the overall investment with the Gallup Index of Investor Optimism falling to -49 in a new Dec. 16-18 poll. This down slightly from the already highly pessimistic rating of -47 in November.

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Investors Highly Pessimistic About the Economic Outlook

A year ago in December 2007, investors were slightly pessimistic about the economic outlook for the next 12 months with the Economic Dimension of the Index at -7 -- a negative number reflects investors as a group turning pessimistic about the future direction of the economy. This turned out to be a prescient view, as we now know that the U.S. economy has been in recession since December of last year.

Earlier this year, investors turned even more pessimistic about the economic outlook as the Economic Dimension of the Index plunged to -40 in February, surpassing its previous low of -30 in March 2003 set at the outset of the Iraq war. By November, investor pessimism concerning the outlook for the economy over the next 12 months deepened with this dimension of the Index falling even further to -60 before its most recent decline to -64 this month.

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Investors Slightly Optimistic About Their Own Portfolios

In sharp contrast to their expectations concerning the future direction of the economy, investors have been reasonably optimistic about their own investment portfolios. Last December, the Personal Dimension of the Index stood at +57. In February of this year, even as they became considerably more pessimistic about the economic outlook, investors remained fairly optimistic about their own portfolios as the Personal Dimension of the Index was at +62. Not surprisingly given the plunging equity markets and the global financial crisis, investor expectations concerning their own investment portfolios have fallen sharply. Nonetheless, in December of this year, investors remained slightly optimistic about their personal portfolios, with the Personal Dimension at +15 -- one of the lowest levels of personal financial optimism since inception of the Index in October 1996. Still, this positive number is somewhat amazing considering how much the investment climate has deteriorated since the equity markets peaked in October 2007.

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Investors Optimistic About Longer Term

One key source of investor optimism about their personal portfolios has to do with their view of the longer term. By a margin of 57% to 28%, investors say they are optimistic as opposed to pessimistic about their ability to achieve their investment goals over the next five years.

On the other hand, investors have more mixed views of the near term. In terms of their income, they are more optimistic (53%) than pessimistic (27%) about being able to maintain or increase their earnings over the next 12 months. However, in terms of being able to reach their investment targets over the next 12 months, they are more pessimistic (47%) than optimistic (33%).

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Commentary

Gallup's Index of Investor Optimism is designed to reflect American investors' views of the investment climate. Econometric analysis has shown that Gallup's Index a somewhat better predictor of the future direction of the U.S. economy than traditional consumer confidence measures. The Index of Investor Optimism peaked in January 2000 at 178 -- prior to the bursting of the dot-com bubble. Before this year, the low for the Index was 5 in March 2003 reflecting investor concerns at the outset of the Iraq war.

Investor pessimism this year -- particularly, its depth in November and December -- suggests pervasive pessimism among upper-income Americans heading into 2009. This is consistent with Gallup's other consumer confidence measures and its Christmas spending estimates. Of course, none of this is good news for the nation's retailers this holiday season or early next year -- particularly those serving the upscale market.

Still, there is a positive aspect of this new Index of Investor Optimism poll. Even with all the financial chaos of 2008 -- the unprecedented market volatility, the collapse of numerous major financial institutions, and topped off by the crash of the biggest Ponzi scheme in history -- American investors remain optimistic as a whole about their personal investments, particularly in the longer term. This is a huge vote of confidence in the U.S. financial system, the free markets, and the U.S. economy on the part of the average American investor. It is a remarkable way to end one of the most financially tumultuous years in U.S. history and something positive for the new Obama administration to build on in 2009.

Survey Methods

Gallup Poll Daily interviewing includes no fewer than 1,000 U.S. adults nationwide each day during 2008. The Index of Investor Optimism results are based on questions asked of 1,000 or more investors over a three-day period each month (Dec. 16-18, Nov. 24-26, June 3-6, April 25-28, March 28-31, and Feb. 28-March 2). For results based on this sample, the maximum margin of sampling error is ±3 percentage point.

Results for May are based on the Gallup Panel study and are based on telephone interviews with 576 national adults, aged 18 and older, conducted May 19-21, 2008. Gallup Panel members are recruited through random selection methods. The panel is weighted so that it is demographically representative of the U.S. adult population. For results based on this sample, one can say with 95% confidence that the maximum margin of sampling error is ±5 percentage points.

For investor results prior to 2008, telephone interviews were conducted with at least 800 investors, aged 18 and older, with at least $10,000 of investable assets. For the total sample of investors in these surveys, one can say with 95% confidence that the margin of sampling error is ±4 percentage points.

In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.

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