GALLUP NEWS SERVICE
PRINCETON, NJ -- Prior to the bursting of the "dot-com bubble," former Fed Chairman Alan Greenspan talked about the "irrational exuberance" on Wall Street. As the Dow Jones average surpassed 13,000 in the face of surging gas prices, a slowing U.S. economy, and signs of increasing stagnation and inflation -- "stagflation" -- one can only wonder whether the Street isn't experiencing another bout of such "irrationality."
Despite the surprisingly good earnings reported by corporate America in the first quarter, investor concerns about surging gas prices at the pump are increasing and their fears that the residential real estate market has not reached bottom remain unabated. As a result, it is not surprising that investor optimism declined for the third month in a row, according to the new UBS/Gallup Index of Investor Optimism poll. The surprisingly weak preliminary GDP estimate and the higher-than-expected core inflation rate reported for the first quarter 2007 simply tend to validate current investor concerns and the economic reality of stagflation.
Higher Gas Prices Worry Investors
Nearly three in four investors (72%) say they believe energy prices are hurting the current investment climate "a lot" -- up from 63% who voiced their concerns about high energy prices in March, and the 58% who reported concern in February. This is the highest level of investor concern about energy prices since August of last year, when 78% said energy prices were hurting the investment climate a lot. This compares with 55% of investors who point to international tensions as hurting the investment climate a lot, 51% who point to the federal budget deficit as their major concern, and 41% who are worried about a real estate crash in some local markets.
On average, investors report paying $2.73 for a gallon of gas during the first half of April -- up 23 cents from what they said they were paying a month ago, and up 52 cents from what they were paying two months ago. More importantly, recent price increases have sent the gas prices far above the $2.39 per gallon investors anticipated paying at this time when they were asked in February of this year. Investors now expect gas prices to increase to an average price of $3.02 a gallon over the next three months -- an important psychological level according to past Gallup surveys.
Investors Also Worry About the Residential Real Estate Market
This month, 7 in 10 investors say they believe conditions in the residential real estate market are getting worse nationwide, not better -- about the same as the 72% reported from March, but up from the 63% of investors who felt this way in February. Similarly, 56% of investors say conditions in their local community's residential real estate market are getting worse, not getting better -- about the same as the percentage who held this view in March (58%) and February (56%). Thirty-eight percent of investors rate conditions in their local residential real estate market as "good or excellent" in April, while 44% rate conditions as "fair," and 17% rate them as "poor."
Investor Optimism Declines for Third Month in a Row
Investor optimism now stands at 74 -- down 4 points from the 78 of March, and 29 points from the 103 in January. This places the Index at its lowest level since September 2006 when the Index also stood at 74. Interestingly, the Index peaked at 178 in January 2000, months before the dot-com bubble burst during that following spring. The Index is conducted monthly and had a baseline score of 124 when it was established in October 1996.
The Personal Dimension of the Index that measures people's optimism about their own portfolios over the next 12 months fell to 62 in April from 68 in March -- its lowest level since last October when it was also at 62. The Economic Dimension of the Index that measures people's optimism about the economy over the next 12 months increased to 12 in April from 10 in March.
Irrational Exuberance?
The National Association of Realtors reports that existing home sales fell by 8.4% in March -- the most since 1989 and the lowest annual sales rate (6.12 million units) since June of 2003. This tends to reconfirm investor concerns that conditions in the residential real estate market are continuing to deteriorate with no bottom in sight.
Similarly, gas prices at the pump are now approaching the psychologically important level of $3.00 a gallon with some forecasters talking about the even greater psychological hurdle of $4.00 a gallon this summer. Given investors worries about higher gas prices and their fears of continued deterioration in the housing market, it is not surprising that 64% of investors describe the current U.S. economy as being in a slowdown (54%) or a recession (10%).
Given what seems to be stagflation in the United States, what explains the irrational exuberance on Wall Street? There are numerous reasons stocks are surging, including an excess of liquidity around the world, private equity purchases taking public companies private, merger mania, and aggressive stock buy-back programs. Still, the most important factor may be the surprisingly good earnings many U.S. companies experienced in the first quarter -- particularly with their operations overseas. It seems as though many people believe the world economy can continue to do well providing stronger than previously anticipated corporate earnings in the future, even as the U.S. economy slows or experiences a recession. We're likely to test this globalization hypothesis along with Wall Street's irrational exuberance later this year and in early 2008.
Survey Methods
Investor results are based on telephone interviews with 802 investors, aged 18 and older, conducted April 1-15, 2007. 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.