Economy

U.S. Investor Optimism Shows Sharp Improvement

by Dennis Jacobe, Chief Economist

March reading is up from all-time low

PRINCETON, NJ -- The Gallup Index of Investor Optimism, a broad measure of investor perceptions, showed a sharp improvement in March, increasing 41 points to -23 -- up from -64 in February, which was its lowest level since the Index's inception in 1996.

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Economic Optimism Shows Sharp Improvement

While the Index -- a survey of those with $10,000 or more in investable assets -- reflects continued pessimism among investors as a group, it more than reversed its February plunge. The Index peaked at 178 in January 2000, just prior to the bursting of the dot-com bubble. Last year, it turned negative for the first time in its history. Before last year, its low was 5 in March 2003, reflecting investor concerns at the outset of the Iraq war.

Investor optimism about the direction of the U.S. economy over the next 12 months improved significantly in March, as the Economic Dimension of the Index increased 30 points to -40. This is basically the same level of optimism about the economy that investors held in June 2008 (when this dimension was at -39) and a year ago (-38).

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Portfolio Optimism Also Improves

Investors' optimism expectations for their personal portfolios over the next 12 months also improved in March, as the Personal Dimension of the Index increased 11 points to 17 -- up from 6 in February and essentially the same as January's 19.

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Commentary

March's sharp improvement in investor confidence coincides with the recent surge in consumer confidence as reflected by Gallup's Consumer Mood Index, particularly among upper-income households. The "wealth effect" associated with a sharp increase in stock values clearly has a positive impact on all consumers and an even more pronounced effect on upper-income consumer confidence. If this continues for some period of time, it should also result in increased spending by upper-income households -- something the economy desperately needs.

Whether the overall surge in investor and consumer confidence can be not only maintained but built on will depend on conditions in the overall economy over time. In the immediate term, however, a number of major government efforts are likely to play a role. For example, the Federal Reserve is now involved in a historic effort to get credit moving once again. While the longer-term effects of these efforts may be subject to debate, the short-term impact seems to be a clear positive for the U.S. economy. In particular, the lowering of mortgage rates will not only help the housing market on the margin, but also allow many homeowners to refinance and, thus, rebuild their balance sheets.

Similarly, the Treasury's new program to address the "toxic" banking assets issue is a step in the right direction. It is too early to tell how successful this undertaking will be, but at least the fundamental problems of the financial sector are finally being addressed. And the proposed plan can be modified as needed as it unfolds in the weeks and months ahead.

Still, there continue to be enormous political and economic challenges ahead. One of the most troubling -- signs of class warfare -- raised its head last week in regard to the AIG executive bonuses. While good arguments can be made that the nation's income distribution has unfairly favored Wall Street over much of the past decade, the potential for confiscatory and retroactive taxation as reflected by the House's action last week is likely to create new uncertainties for investors and upper-income consumers. In turn, this could make it more difficult to get these consumers spending once more -- something that is essential to getting the economy back on track.

Survey Methods

Gallup Poll Daily interviewing includes no fewer than 1,000 U.S. adults nationwide each day during 2008 and 2009. The Index of Investor Optimism results are based on questions asked of 1,000 or more investors over a three-day period each month, conducted March 16-18, Feb. 17-19, and Jan. 16-18, 2009; and Dec. 16-18, Nov. 24-26, June 3-6, April 25-28, March 28-31, and Feb. 28-March 2, 2008. For results based on these samples, the maximum margin of sampling error is ±3 percentage point.

Results for May of last year 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, and having at least $10,000 of investable assets. For the total sample of investors in these surveys, one can say with 95% confidence that the maximum margin of sampling error is ±4 percentage points.

Interviews are conducted with respondents on land-line telephones (for respondents with a land-line telephone) and cellular phones (for respondents who are cell-phone only).

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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