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Incurable Optimists: Visions of 12% Returns

Incurable Optimists: Visions of 12% Returns

by Raksha Arora

The U.S. economy seems to be turning, and Americans' optimism is rising accordingly. As of Gallup's June 12-15 poll*, 45% of Americans believed that economic conditions in the country are getting better, compared to 40% who thought so in May and only 23% who felt that way in the beginning of March. The UBS/Gallup Index of Investor Optimism, at 77 in June, has almost doubled since May.

Objective measures are also offering encouraging news. The case for capital spending by firms is beginning to look better, as well as the outlook for earnings. Oil prices have fallen, unemployment numbers have come out better than expected, interest rates are at a 45-year low, and tax cuts will be in effect soon.

Economists are still cautious, but investors are surely looking for a sustained summer rally on the stock market. The benchmark S&P 500 Index is up nearly 11% year-to-date, and the Dow has climbed 24% since last October. The Investment Company Institute, the national trade association for mutual funds, trusts, and closed-end funds, reported stock fund inflows of $16.1 billion in April and $12.1 billion in May, compared to $276 million in March. Cash levels at stock funds are decreasing steadily and fund managers bought $14.6 billion in stocks in May, compared to $2.7 billion in April.

Double-Digit Dreams

According to the Index of Investor Optimism, 62% of substantial investors (those with $100,000 or more in investable assets) and 53% of investors overall are either very or somewhat optimistic about the performance of the stock market in the next 12 months.

Investors reported an average return of 4.7% on their investment portfolios in the last 12 months, yet when asked to forecast their expected return over the next 12 months, the average response was 12%. Interestingly, this expected return of 12% closely mirrors the performance of the S&P 500 so far in 2003. However, given that bonds are fully priced and there is a high risk of the equity markets giving up their gains, an expected return of nearly 12% is predicated precariously on a best-case scenario playing out.

Meanwhile, the Fed has cut interest rates to levels not seen since 1958, moving aggressively to prevent the economy from spiraling into a deflationary trap and succumbing to Japan's fate. So while investors make projections based on rosy scenarios, the Fed is still hedging against a darker outlook. While markets dipped right after the news of the latest rate cut, overall it seems that investors are paying more attention to Fed Chairman Alan Greenspan's upbeat rhetoric, rather than his more precautionary actions.

Bottom Line

It is an established tenet of investment theory that stocks outperform bonds over the long run. But in the immediate term, stocks may not be able to deliver the returns investors are expecting, despite the fact that consensus forecasts are bullish. With bonds fully priced and the real estate market showing signs of an asset bubble, investors' ebullience may be outpacing the recovery. Where is the 12% return going to come from?

*Results are based on telephone interviews with 1,006 national adults, aged 18 and older, conducted June 12-15, 2003. For results based on these total samples, one can say with 95% confidence that the margin of sampling error is ±3%.


Gallup https://news.gallup.com/poll/8752/Incurable-Optimists-Visions-12-Returns.aspx
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