GALLUP NEWS SERVICE
PRINCETON, NJ -- Overall investor optimism increased slightly once again in July -- the second marginal increase in a row, according to the latest UBS/Gallup Index of Investor Optimism poll. Among the top investor worries holding back investor optimism are concerns about today's high energy prices and the continued outsourcing of jobs overseas. Even though the initial wave of terrorist bombings in London took place during the poll, the threat of another terror attack in the United States remains low on the list of investor concerns.
Since the July 7 bombings, the Dow has surged 381 points and has approached a four-year high. While this seems to validate the relatively low ranking of "a potential new terrorist attack" in the poll, it also seems to contradict the tepid improvement in optimism recorded during the past two months.
The answer to this contradiction appears to lie in the significant divergence in views between substantial investors (those having $100,000 or more in investable assets) and average investors (those having at least $10,000 but less than $100,000 in investable assets). Substantial investors are not only more optimistic than other investors about their own personal portfolios but also more optimistic about the future direction of the economy. And, it is the views of substantial investors that seem to be driving Wall Street at the moment.
Energy Prices Remain the Top Investor Worry
Given oil prices at nearly $60 a barrel and the recent increases in gas prices at the pump, it is not surprising that energy prices top the list of investor worries in July, with 71% saying the price of gas and oil is hurting the current investment climate "a lot." This is similar to the 72% who held such concerns in May, but up from 56% in February.
Second among investor worries -- behind energy prices -- is the outsourcing of jobs to foreign countries, with 61% of investors saying this activity is hurting the current investment climate a lot. Concerns over the federal budget deficit are next, with 51% of investors saying it is hurting the investment climate a lot, followed by the current situation in Iraq at 46%, identity theft at 44%, questionable accounting practices at 42%, and illegal immigration at 39%.
Eighth on the list among the 12 potential sources of concern included in the poll is the threat of more terrorist attacks, with 36% of investors saying this is hurting the investment climate a lot. This is up from the 28% of investors who had similar concerns in February and May.
Significantly, few investors seem worried about higher interest rates, even after the Fed has hiked short-term interest rates nine consecutive times at its regular monetary policy meetings. Only 17% of investors say the current level of interest rates is hurting the investment climate a lot. This is virtually the same as the 16% who were concerned in May and the 15% who were similarly worried in February.
Investor Optimism Remains Weak
Overall investor optimism has increased slightly over the past couple of months, going from 50 in May to 54 in June, and then to its current reading of 58. However, the Index of Investor Optimism remains within eight points of the May reading, its lowest level of the past two years.
The Personal Dimension is at 56 -- up from 53 in June and 51 in May. The Economic Dimension is at 2, suggesting that investors as a whole are essentially neutral on the future direction of the U.S. economy.
Substantial Investor Optimism Surges
Substantial investor optimism nearly doubled in June, increasing to 91 from 51 in May. It increased another four points to 95 this month. In sharp contrast, average investor optimism fell 15 points, decreasing from 49 in May to 34 in June. In July, it increased by three points and now stands at 37. While substantial investors are somewhat optimistic about the economy, as reflected by their Economic Dimension rating of 17, average investors are somewhat pessimistic, with a rating of -7.
Why the Divergence in Views?
On July 20 and 21, in what may be Federal Reserve Chairman Alan Greenspan's last presentation to the House and the Senate concerning the future course of the economy and monetary policy, he observed, "The data released over the past two months or so accord with the view that the earlier soft readings on the economy were not presaging a more serious slowdown in the pace of [economic] activity. Employment has remained on an upward trend, retail spending has posted appreciable gains, inventory levels are modest, and business investment appears to have firmed."
He went on to say, "Should the prices of crude oil and natural gas flatten out after their recent run-up -- the forecast currently embedded in the futures markets -- the prospects for aggregate demand appear favorable."
These statements seem to fully reflect the views held by most substantial investors and much of Wall Street. The idea as enunciated by Greenspan is that today's consumers will continue to buy despite the current high gas prices because of their wealth gains in both the stock and real estate markets, relatively low interest rates, and ongoing increases in employment and income.
All of this is true for those who have quality jobs, own their homes, and have stock or other substantial investments in the equity markets and/or the real estate markets. In this context, high gas prices are an unpleasant burden but one that is manageable. Since most substantial investors fall into this category, it is not surprising that they, like Wall Street, are optimistic about both the economy and the investment climate.
On the other hand, there are many lower- and middle-income Americans who have not enjoyed these significant wealth gains. Many have also experienced wage compression and have seen employees where they work and at other companies laid off because of corporate outsourcing to foreign countries or for other reasons. The fact that many of these layoffs are occurring at companies reporting significant profits only adds to the level of employee job insecurity.
According to the Department of Energy, the average price of a gallon of regular gas last week in the United States was $2.32 -- up $0.39 from a year ago. For many lower- and middle-income consumers, this surge in gas prices at the pump is causing real financial hardship. Since many average investors fall into this category, it is also not surprising that they tend to be much less optimistic about both the economy and the investment climate.
Does This Divergence Matter?
Clearly, where one sits in today's economy in terms of wealth, income, and job security matters a great deal to one's individual wellbeing. But, does it matter from an overall economic perspective? Evidently, many substantial investors, Wall Street observers, and monetary policymakers don't seem to think this divergence will slow the economy in the months ahead. It may not be until retailers report their results for the important back-to-school sales period that it will be clear whether the optimists are right.
Results for the Index of Investor Optimism poll are based on telephone interviews with 801 investors with at least $10,000 of investable assets, aged 18 and older, conducted July 1-17, 2005. For results based on the total sample of investors, one can say with 95% confidence that the maximum 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.