Bush Faces Worried Investors as He Speaks Tonight

GALLUP NEWS SERVICE

PRINCETON, NJ -- As the president speaks to the nation tonight, investors around the world will be listening. As was the case last year, geopolitical concerns dominate the economic outlook. This year, however, the world's investors are a lot less optimistic about the investment climate than they were 12 months ago. The world's equity markets are plunging. And the president's economic proposals have failed to gain momentum.

As a result, the burden on the president to reassure the world's investors in tonight's State of the Union address is much greater than it was a year ago. His success in rebuilding worldwide investor confidence in the U.S. economy will go a long way in determining how the world's economy performs in the months ahead.

Investor Optimism Far Below a Year Ago

Investor confidence in both the United States and Europe has fallen far below that of a year ago, according to the January 2003 Index of Investor Optimism in the United States and the EU5. (Both indices are the result of the joint effort of UBS and The Gallup Organization.) And, over the past year, both indices have fallen 75 points:

• The Index of Investor Optimism--U.S. was at 115 in January 2002 and is now at 38 in January 2003 -- its second lowest level since its inception in October 1996.
• The Index of Investor Optimism--EU5 was at 40 in January 2002 and is now at -37 in January 2003 -- its second lowest level since its inception in October 2001.

Last year at this time, about one out of four U.S. investors (27%) said it was not a good time to invest in the financial markets. This January, nearly half of U.S. investors (47%) say it is not a good time to invest. Over the same period, the percentage of European investors saying it is not a good time to invest increased from 48% in January 2002 to 60% in January 2003.

U.S. Investor Optimism Declined in January

New Index of Investor Optimism--U.S. poll data (Jan. 1-15) show overall U.S. investor optimism declined to 38 in January -- down 14 points from December's reading of 52. This is the U.S. Index's lowest level in three months -- and its second lowest level ever. The U.S. Index stood at 115 in January 2002 and then increased to 121 in March. Since then, it has trended downward throughout the year, reaching a new all-time low of 29 in October. It increased in November and December before falling again in January.

The Personal Dimension of the U.S. Index fell 6 points in January and now stands at 44. This is above its October 2002 low of 40 and about the same as its November level (43). The Personal Dimension of the U.S. Index is about half of its level of a year ago (85), but remains positive -- suggesting that investors are still generally optimistic about their personal financial situations.

The Economic Dimension of the U.S. Index fell 8 points in January to -6. This is its second lowest level ever -- this dimension of the Index fell to -11 in September 2001 and again in October 2002. The Economic Dimension of the U.S. Index is now far below where it was a year ago (30) and suggests that investors are now generally pessimistic about the economic outlook for the next 12 months.

Index of Investor Optimism – U.S. January 2000 – January 2003

EU5 Investor Optimism Stayed Down in January

In January 2002, the Index of Investor Optimism--EU5 (conducted in five countries in Europe: France, Germany, Great Britain, Italy, and Spain) increased 36 points from its October 2001 level, reaching 40. Like its U.S. counterpart, European Optimism trended downward throughout 2002, reaching a new low of -38 in December. In January 2003, EU5 investors remained essentially unchanged at -37. Unlike U.S. investors, Europe's investors are generally pessimistic about the current investment climate and have been since September of last year.

As was the case in the United States, EU5 investors are positive along the Personal Dimension, which is at 5 in January 2003. Europe's investors, however, are very pessimistic along the Economic Dimension at -42 -- and this is a slight improvement from the -49 of December 2002.

Index of Investor Optimism – EU5 October 2001 – January 2003

Key Points

Clearly, the current world economy is a lot weaker than it was a year ago at this time. Given that econometric analysis suggests that investor optimism is a leading economic indicator, January's investor survey results imply that the economy will not be seeing much improvement during the months immediately ahead.

In this regard, the president faces a much different situation as he speaks tonight. So does the Fed, as it holds two days of policy meetings this week. From an investor sentiment perspective, today's situation seems to resemble the period following Sept. 11 much more than it does conditions during last year's State of the Union address.

The president and the Fed were very successful in meeting the challenge presented by the investor crisis of confidence in September 2001. Hopefully, they will enjoy similar success as they attempt to reassure the world's investors this week.

Survey Methods

Results for the Index of Investor Optimism--U.S. are based on telephone interviews with a randomly selected U.S. sample of 1,000 adult investors, 18 years and older, with at least $10,000 of investable assets, conducted Jan. 1-15, 2003. Results for the Index of Investor Optimism--EU5 are based on randomly selected samples of approximately 200 investors each in France, Germany, Great Britain, Italy, and Spain conducted Jan. 1-17, 2003.

For results based on these samples, one can say with 95% confidence that the maximum error attributable to sampling and other random effects is plus or minus 3 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.