skip to main content

Investor Optimism Highest Since January

Surging equity markets outweigh soaring gas prices and continued housing concerns

by Dennis Jacobe

GALLUP NEWS SERVICE

PRINCETON, NJ -- Despite soaring gas prices at the pump and fears that the residential real estate market is continuing to deteriorate, investor optimism surged in May, according to the UBS/Gallup Index of Investor Optimism, and now stands at its highest level since January. One obvious reason for the sharp improvement in May involves the Personal Dimension of the Index, which shows investors are now much more optimistic about their personal investment portfolios -- with their optimism at its highest level in more than five years.

Another reason for the sharp increase in investor optimism in May is that investors are now somewhat more optimistic about the overall economic outlook. In fact, the Economic Dimension of the Index -- which reflects investor optimism about the direction of the overall U.S. economy over the next 12 months -- increased in May, although it remains below where it was earlier this year.

Investor Optimism Increases

Investor optimism surged 21 points in May and now stands at 95, according to the UBS/Gallup Index of Investor Optimism. This puts the Index at its highest level since January, when it reached 103, and 31 points above its level of a year ago. The Index is conducted monthly and had a baseline score of 124 when it was established in October 1996. It peaked at 178 in January 2000 and hit its low of 5 in March 2003.

The Personal Dimension of the Index, which reflects investors' optimism about their personal investment portfolios, increased 13 points in May, to 75 -- its highest level since March 2002, when it was at 80. The Economic Dimension of the Index increased 8 points in May, to 20. Although this increase represents a substantial improvement in investor optimism about the direction of the U.S. economy, the Economic Dimension remains below its February level (23) and is even further below its January level (30).

Higher Gas Prices Worry Investors

The recent surge in gas prices at the pump is certainly one reason investors aren't as optimistic about the U.S. economy as they were earlier this year. Over the past couple of months, gas prices have not only increased, but have done so at a rate far exceeding investor expectations. In response, many investors are telling Gallup they will not only cut back where possible on their energy use, but will also reduce their overall spending in other areas.

Three in four investors (76%) say they believe energy prices are hurting the current U.S. investment climate "a lot" -- up from 72% who voiced concerns about high energy prices in April, 63% in March, and 58% in February. May's results show 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. By contrast, 53% of investors point to international tensions as hurting the U.S. investment climate a lot, 48% say this about the federal budget deficit, and 38% say the potential for a real estate crash in some local markets is having this effect.

On average, investors report paying $3.04 for a gallon of gas during the first half of May -- up 54 cents from what they said they were paying two months ago, and 83 cents from what they were paying three months ago. More importantly, recent price increases have sent energy prices far above the $2.39 per gallon investors expected to pay over the next three months when asked in February. Investors now expect gas prices to increase to an average of $3.38 a gallon over the next three months.

Given their expectations for higher gas prices at the pump, 51% of investors say they plan to cut back on their driving this summer, 43% say they plan to cut back on their vacations, 39% say they plan to cut back on their use of air conditioning or fans, and 60% say they plan to cut back on other spending in general.

Investors Continue to Worry About Housing

In addition to their concerns about the potential impact of surging energy prices on consumer spending and economic growth, investors remain concerned about the continued deterioration of the residential real estate market. In the current survey, 73% of investors say they believe conditions in the residential real estate market nationwide are getting worse, not better -- about the same as the 70% who felt this way in April and the 72% in March. Similarly, 58% of investors say conditions in their local communities' residential real estate markets are getting worse rather than better -- about the same as the percentage who held this view in April (56%) and March (58%). Currently, 39% of investors rate conditions in their local residential real estate markets as "good" or "excellent" while 42% rate conditions as "only fair" and 19% as "poor" -- about the same as April's ratings.

A Test for the Global Economy?

Over the past couple of months, it seems as though the equity markets have adopted a global economic view that separates them -- to a large degree -- from the U.S. domestic economy. In part, this may relate to the worldwide earnings of many global companies in the United States. Assuming the rest of the world economy can continue growing as the U.S. economy slows, globalization may allow these global companies to maintain or even increase their worldwide earnings even if their domestic earnings decline during the months ahead.

Similarly, the ready availability of liquidity worldwide has encouraged a surge in leveraged buyouts as well as other mergers and acquisitions. In this context, globalization has created a worldwide search for potential high-investment returns and the associated speculation.

Finally, the significant gains on Wall Street have done great things for the portfolios of American investors. These portfolio gains may create a new "wealth effect" among the U.S. investor class. In turn, this could help maintain or even increase consumer spending in the United States if upper-income consumer spending more than offsets any declines in middle- and lower-income spending that result from surging gas prices.

Will globalization allow the equity markets to remain strong even as the U.S. economy continues to slow? Will the strength of the world economy continue and help moderate the slowing of the U.S. economy? Or will all of these new global trends turn out to be a house of cards similar to the dot.com bubble? This remains to be seen as the real economic effects of increased globalization are tested in 2007 and 2008.

Survey Methods

Investor results are based on telephone interviews with 800 investors, aged 18 and older, conducted May 1-16, 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.


Gallup https://news.gallup.com/poll/27697/Investor-Optimism-Highest-Since-January.aspx
Gallup World Headquarters, 901 F Street, Washington, D.C., 20001, U.S.A
+1 202.715.3030