Why the Divergence in Investor Optimism?

GALLUP NEWS SERVICE

During August, overall investor optimism showed a slight increase, according to the Index of Investor Optimism -- a joint effort of UBS and The Gallup Organization. All of the increase came along the Personal Dimension of the Index. The Economic Dimension remained essentially unchanged.

More importantly, the August data show a sharp divergence in optimism between "substantial investors" -- those with at least $100,000 of investable assets -- and their less well-off counterparts. Optimism among substantial investors surged to its highest level in more than a year. At the same time, optimism among other, or "average," investors continued to decline from its April and June highs. The key question for the future is whether this divergence in investor views is simply a temporary phenomenon or something more significant, reflecting some fundamental changes taking place in the U.S. economy.

Overall Investor Optimism Increases in August

The Index of Investor Optimism increased seven points in August, reaching 61. This increase leaves the Index 16 points below where it was in June and five points below its April level. The Personal Dimension of the Index increased eight points in August and now stands at 56. It accounted for all of the increase in the overall Index. The Economic Dimension of the Index declined to 5, essentially unchanged in August. This means that investors overall remain only slightly optimistic about the economic outlook, although much less so than they were in June (16).

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

Optimism Among Substantial Investors Surges

The Index of Investor Optimism among substantial investors increased 40 points in August, to 106. This puts substantial-investor optimism above its June level (96) and at its highest point since April 2002 (111). For substantial investors, the Personal Dimension of the Index increased by 29 points in August and now stands at 77. The Economic Dimension of the Index increased by 11 points, reaching 29. Both the Personal and Economic Dimensions of the substantial-investor Index are now at their highest points since April of last year.

Index of Investor Optimism – U.S. January 2000 – August 2003 Among Substantial Investors

Optimism Among Average Investors Declines

In sharp contrast, the Index among average investors continued to decrease in August, falling 11 points to 36. This follows a drop of 19 points in July and places the Index at less than half its April 2003 level (76). The Personal Dimension of the Index for average investors decreased by five points in August and now stands at 44. The Economic Dimension decreased by seven points, reaching –8. For average investors, the Economic Dimension of the Index now reflects overall pessimism about the economic outlook.

Index of Investor Optimism – U.S. January 2000 – August 2003 Among Average Investors

Reasons for the Divergence in Optimism

With a significant amount of money to invest, substantial investors have many reasons to be optimistic. The equity markets continue to do well, even during the dull days of August. Dividend taxes have been reduced and the tax rebates appear to be having a positive impact on retail sales. The overall economy is growing. Most importantly, company profits are not only doing well but are expected to increase significantly during the next couple of quarters.

On the other hand, average investors, who depend almost entirely on their jobs for their economic wellbeing, have reason to be much less optimistic, particularly when they look at the job market. In this regard, a recent Gallup Poll (Aug. 4-6) of employees working full- or part-time provides some remarkable findings for an economy that is growing and presumably on the path to recovery:

• One out of three employees (34%) say their employer has laid people off during the past six months.
• Nearly one out of three employees (31%) say they are personally worried about their benefits being reduced in the near future.
• One out of five employees (19%) say they are personally worried about being laid off in the near future.
• One out of six employees (17%) say they are personally worried that their wages will be reduced in the near future.
• One out of seven employees (15%) say they are personally worried that their work hours will be reduced in the near future.
• One out of ten employees (9%) say they are personally worried that their company will move their job overseas in the near future.

When it comes to the general public, the same poll finds:

• Eight out of 10 Americans (81%) say it is a bad time to find a quality job.
• Six out of 10 Americans (61%) expect the unemployment rate to stay where it is or go higher over the next six months.
• Half of the public (49%) describes the current employment situation as poor.

The significant divergence in optimism between substantial and average investors seems largely attributable to what the two types of investors see as most important to their own personal economic wellbeing: increasing corporate profits and equity prices on the one hand, and increasing job opportunities and wages on the other. In the past, such a divergence -- if it took place -- was only temporary. Economic growth meant both increasing corporate profitability and increasing employment and wages.

However, this may no longer be the case. Currently, economic growth is being achieved by way of increased productivity. Of course, this kind of growth is good for the corporate bottom line, profitability, and the equity interests of many investors. But economic growth without job creation is not good for those currently looking for a job, those fearing they may soon be laid off, or those fearing that their wages and benefits may be reduced in the near future -- even if they have some modest investments.

Unfortunately, Gallup's economic polling data suggest that many investors -- as well as most of the general public -- expect current economic trends to continue for some time. As a result, many substantial investors are looking for higher equity prices while their less well-off counterparts are looking for continued high unemployment. This suggests that the gap in optimism between substantial and average investors may continue to increase -- that is, the optimism of the two groups will diverge further -- in the months ahead. It also implies that today's divergence on investor optimism may not be a temporary phenomenon but instead may be a reflection of some more fundamental changes taking place in the way the U.S. economy grows.

Survey Methods

Results for the "Index of Investor Optimism -- U.S." are based on telephone interviews with a randomly selected U.S. sample of 803 adult investors, 18 years and older, with at least $10,000 of investable assets, conducted August 1-14, 2003. For results based on these samples, one can say with 95 percent confidence that the maximum error attributable to sampling and other random effects 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.