Investor Optimism Surges to Match High for Year

GALLUP NEWS SERVICE

PRINCETON, NJ -- Investor optimism surged this month, according to the November UBS/Gallup Index of Investor Optimism. Investors seem buoyed not only by the new records being set on Wall Street, but also by significantly lower energy prices, stable interest rates, and what they see as an increasingly likely "economic soft landing." For now, these positive trends seem to more than offset investor concerns about the recessionary conditions in both the auto and residential real estate markets.

Investor Optimism Continues to Increase

The Index of Investor Optimism surged 14 points in November on top of its 26-point increase in September (21-point increase) and October (5-point increase), following the year low of 53 in August. The Index now stands at 93 -- matching its year high in January. This is the highest level for the Index since June 2004, when it stood at 95. The Index is now 43 points higher than the 50 it stood at a year ago. The Index is conducted monthly; its baseline score was 124 when it was established in October 1996.

The November increase came from both the Personal and Economic Dimensions of the Index. The Personal Dimension increased 6 points to 68 in November -- up 14 points from 54 in August. The Economic Dimension increased 8 points in November on top of its 12-point increase in September and its 5-point increase in October and now stands at 25 -- its highest level since June 2004. Investors as a whole have gone from being essentially neutral on the economy just three months ago to being somewhat optimistic about the economic outlook over the next 12 months.

Federal Budget Deficit and International Worries Now Match Energy Concerns

Investors' concerns about high energy prices continued to decline in November, as the percentage of investors saying they believe energy prices are hurting the investment climate "a lot" fell to 54% -- its lowest level since we began measuring it in March 2004. In sharp contrast, 78% of investors said energy prices were hurting the U.S. economy "a lot" in August 2006 and 71% of investors said the same last November. About the same percentage of investors now point to the federal budget deficit (53%) and international tensions (52%) as major worries, as point to energy prices.

Investors Expect "Soft Landing"

Investors' expectations for a so-called "soft landing" for the U.S. economy also increased in November. The percentage of investors saying the United States is experiencing a "recovery" or an "economic expansion" rose to 46% -- up from 38% in September and 43% in October. Another 41% say the economy is in a "slowdown," while only 1 in 10 investors say they believe the United States is in a recession.

Housing May Have a "Hard Landing"

While investors are clearly more optimistic than they have been about the U.S. economy overall, they remain concerned about conditions in the residential real estate markets. Most investors seem to believe that the real estate markets are going to get worse before they get better, not only nationally, but locally as well. Nearly two in three investors rate conditions in today's residential real estate market nationwide as "only fair" (45%) or "poor" (19%) -- up from 59% in October. Seventy percent say conditions in the residential real estate market nationwide are getting worse, as opposed to only 25% who say they are getting better.

Nearly one in four investors (23%) rate conditions in their local residential real estate market as "poor" in November -- up from 18% in October and 16% in September. Another 36% rate conditions in their local residential real estate market as "only fair." Roughly 6 in 10 investors (59%) say conditions in the local residential real estate market are getting worse. The same percentage of investors felt this way last month, suggesting that many local real estate markets have some way to go before they reach bottom. In this regard, three in four investors (75%) say they believe the potential for a housing or real estate crash in some local markets is hurting the current investment climate "a lot" or "a little."

Economic Outlook

At this point, the growing optimism among investors, as reflected in both the Index of Investor Optimism and the surging stock market, suggests that many investors believe the economic benefits associated with today's sharply lower gas prices will more than offset the negative impact of the weak auto and real estate markets. If this assumption is correct, then the economic outlook for 2007 may be a lot better than many observers anticipate.

On the other hand, the National Association of Realtors just reported that 45 metro area real estate markets saw year-to-year median home prices decline in the third quarter -- the most since they began record-keeping in 1979. To the degree that previous housing price increases created a positive "wealth effect" that supported consumer spending, it seems clear that may no longer exist. Recent housing price declines could have just the opposite impact as a negative "wealth effect" takes hold.

Another reason for caution is the gas price trends. Current gas prices are just about where they were at this time last year. The question is whether they will follow the same pattern next year that they did in 2006. Gas prices increased in early 2006, reaching $2.50 for a regular gallon of gas in mid-March, and then increasing to $2.91 a gallon at the beginning of May before peaking at a little over $3 a gallon in late July/early August. Obviously, a repeat of this pattern could be severely damaging to the 2007 economy.

Of course, there is the so-called "inverted yield curve," reflecting that short-term interest rates remain higher than long-term rates. This often not only indicates a slowing economy, but also a potential recession.

For the time being, however, it appears Wall Street remains optimistic about the economic outlook for 2007. Let's hope that such optimism turns out to be warranted as 2007 unfolds.

Survey Methods

Results for the Index of Investor Optimism poll are based on telephone interviews with 800 investors, aged 18 and older, conducted Nov. 1-16, 2006. For results based on the total sample of investors, one can say with 95% confidence that the margin of sampling error is ±4 percentage points.