PRINCETON, NJ -- Although the Dow Jones average hit 10,000 earlier this month, the Gallup Index of Investor Optimism -- a broad measure of investor perceptions -- gave up its modest 5-point September gain, falling back to its August level of +9.
This is the third month in a row that investors as a whole have been slightly optimistic about the investment climate. It is a sharp improvement from -47 in November a year ago as the financial crisis unfolded. The Index, which dates back to October 1996, was at its lowest ever in February of this year at -64 and peaked in January 2000 at 178.
Portfolio Optimism Down Slightly
American investors -- those having $10,000 or more of investable assets -- remain optimistic about the prospects for their personal investment portfolios. At 33, the Personal Dimension of the Index is down three points from its September high of 36, but it is the second best showing of the year. In this regard, investors appear to be reasonably optimistic about the future performance of their portfolios over the next 12 months. Personal portfolio optimism is up 27 points since its February low of 6, seemingly reflecting the sharp improvement in the stock and commodities markets.
Economic Pessimism Continues
Investors remain pessimistic about the economic outlook as the Economic Dimension of the Index registered -24 in October, down slightly but similar to the -22 of August and September. (A negative score means investors as a whole remain pessimistic along this dimension.) Still, the level of this Dimension over the past three months represents a sharp improvement from June's -42 score and July's -31, not to mention the -70 score in February. While investors have remained neutral or positive about their own investment portfolios throughout the current recession, they have not been positive about the economy's direction at any time measured since December 2007.
While the modest decline in the Index of Investor Optimism for October does not seem to correlate with the Dow Jones Average hitting 10,000, it is fully consistent with a similar falloff in Gallup's Economic Confidence Index. In fact, consumers and investors continue to hold similarly pessimistic views of the future course of the U.S. economy. These views should be confirmed once more when the Reuters/University of Michigan Consumer Sentiment Index is released on Friday.
Further, it seems reasonable that investors show substantially more optimism about their investment portfolios than they do in the overall U.S. economy. The stock market, as well as gold, commodities, and other investments, continues to do well, but only partly in response to the improvement in the economic data. The continuing decline in the value of the dollar and the seeming substitution of commodities as an important store of value appears to be creating a sharp divergence between how investors fare on Wall Street and how the average American is doing on Main Street.
In theory, this kind of divergence should not be maintainable for too long. Still, there are all kinds of artificialities in today's global financial markets -- and lots of liquidity looking for a home. As a result, investors' optimism about their investment portfolios may be warranted given the current investment climate, regardless of their perceptions concerning their outlook for the U.S. economy.
At the same time, Gallup's economic data seem consistent with the way investor and consumer perceptions of the U.S. economy have become less optimistic in October. Job creation remains anemic and consumer spending continues to be flat. It seems likely that these conditions will need to improve significantly before overall investor optimism can return to its pre-recession levels.
Author's Note: Gallup's Index of Investor Optimism -- a survey of those having $10,000 or more of investable assets -- peaked at 178 in January 2000, just prior to the bursting of the dot-com bubble. Last year, the Index turned negative for the first time in its history. Before last year, the low for the Index was 5 in March 2003, reflecting investor concerns at the outset of the Iraq war.
Gallup Poll Daily interviewing includes no fewer than 1,000 U.S. adults nationwide each day during 2008. The Index of Investor Optimism results are based on questions asked of 1,000 or more investors over a three-day period each month, conducted Oct. 23-25, Sept. 28-30, Aug. 18-21, July 24-26, June 25-27, May 26-28, April 21-23, March 16-18, Feb. 17-19, and Jan. 16-18, 2009; and Dec. 16-18, Nov. 24-26, June 3-6, April 25-28, March 28-31, and Feb. 28-March 2, 2008. For results based on these samples, the maximum margin of sampling error is ±3 percentage point.
Results for May 2008 are based on the Gallup Panel study and are based on telephone interviews with 576 national adults, aged 18 and older, conducted May 19-21, 2008. Gallup Panel members are recruited through random selection methods. The panel is weighted so that it is demographically representative of the U.S. adult population. For results based on this sample, one can say with 95% confidence that the maximum margin of sampling error is ±5 percentage points.
For investor results prior to 2008, telephone interviews were conducted with at least 800 investors, aged 18 and older, and having at least $10,000 of investable assets. For the total sample of investors in these surveys, one can say with 95% confidence that the maximum margin of sampling error is ± 4 percentage points.
Interviews are conducted with respondents on landline telephones (for respondents with a landline telephone) and cellular phones (for respondents who are cell phone only).
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.