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Substantial Investors, Substantial Volatility

Substantial Investors, Substantial Volatility

by Dennis Jacobe

The "Index of Investor Optimism -- U.S." has shown incredible volatility in recent months due, at least in part, to the crisis in the Middle East and the potential for a new oil price shock. In addition, it is clear that American investors continue to be concerned about corporate profits, capital spending and the overall strength of the recovery. Further, "Enronitis" may still be clouding the investment climate and making a strong recovery more difficult to achieve.

Given the susceptibility of investor/consumer optimism to a wide range of potentially significant situations, the current economic recovery could be extremely fragile. In this regard, Federal Reserve Chairman Alan Greenspan was on target last week when he told the congressional Joint Economic Committee, "The pickup in the growth of activity … will be short-lived unless sustained increases in final demand kick in before the positive effects of inventory investment dissipate."

Econometric analysis suggests that investor optimism, particularly along the personal dimension and among substantial investors, is predictive of final consumer demands. Therefore, the extreme volatility of the Index of Investor Optimism in recent months simply adds to the uncertainties concerning the strength of final demand and the near-term prospects of the economic recovery. The upshot is that while business decision makers should celebrate the good signs for the economy, they should continue to be cautious as they plan for the second half of 2002.

Greatest Volatility Among Substantial U.S. Investors

New Gallup/UBS Index of Investor Optimism poll data (April-14)* show overall U.S. investor optimism plunged to 89 in April -- down 32 points from March (121) -- back near its February (92) and December 2001 (88) levels. Investor optimism is little changed from where it was in October 2001 (86), when the level bounced back after the Sept. 11 attacks.

Importantly, the volatility in optimism among substantial U.S. investors -- those with $100,000 or more of investable assets -- is more pronounced than it is for U.S. investors as a whole. Overall optimism among substantial U.S. investors surged from 106 in December 2001 to 135 in January 2002. It then fell to 99 in February before soaring again to 155 in March. In April, the index figure for optimism among substantial investors plunged 44 points to 111 -- still higher than it was a year ago (100 in April 2001), but far below where it was two years ago (170 in April 2000).

The personal dimension of the substantial investor index continued its recent pattern of rising one month and falling the next, and is currently lower than it was a year ago (87 in April 2001).

The economic dimension of the substantial investor index followed a similar pattern, soaring to 55 in March and falling 23 points to 32 in April. This dimension is much higher than it was a year ago (13 in April 2001), but far below where it was two years ago (62 in April 2000).

Optimism More Volatile Among Women Than Men

Interestingly, the volatility in investor optimism is more pronounced among women than it is among men. Among female investors, optimism surged from 69 in December 2001 to 92 in January 2002. It then plunged to 60 in February before soaring to 106 in March, and dropping again in April to 65. The Index figure for female investors is now below where it was a year ago (78 in April 2001). It seems clear that this year's economic uncertainties have influenced female investors more significantly than the uncertainties have influenced male investors.

*Results for the Gallup/UBS "Index of Investor Optimism -- U.S." are based on telephone interviews with a randomly selected U.S. sample of 1,006 adult investors, aged 18 and older, with at least $10,000 of investable assets, conducted April 1-14, 2002. For results based on this sample, one can say with 95% confidence that the maximum error attributable to sampling and other random effects is ±3%. 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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