GALLUP NEWS SERVICE
PRINCETON, NJ -- Investor optimism increased slightly in February, according to the UBS/Gallup Index of Investor Optimism. But this slight uptick may already be in jeopardy, based on the way investors rate the major factors hurting the current investment climate.
What are investors' top worries in early 2005? Is the declining value of the dollar gaining prominence on investors' radar screens? How about increasing interest rates?
Energy Prices Are the Top Investor Worry
Energy prices top the list of investor worries, with 87% saying the price of gas and oil is hurting the investment climate. More than half of investors (56%) say energy prices are hurting the investment climate "a lot" and another 31% say they are hurting it "a little." Investors have reflected this same high level of concern about energy prices throughout the past year.
The Value of the Dollar Is Worrying More Investors
Nearly two in three investors (63%) say the value of the dollar is hurting the investment climate "a lot" (27%) or "a little" (36%). This is up 10 percentage points from a year ago, when about half (53%) of all investors had similar concerns. Apprehension over the value of the dollar has increased more than investor concern about any of the other eight areas surveyed both this year and a year ago.
Other Investor Worries
Tied for second among investor worries -- behind energy prices -- is the outsourcing of jobs to foreign countries and the federal budget deficit, with 79% of investors saying each of these is hurting the investment climate. Next on the list of investor concerns are questionable accounting practices (77%), followed by the current situation in Iraq (69%), illegal immigration and the threat of more terrorist attacks (both at 65%), and the value of the dollar (63%). The three issues about which investors show the least concern are general economic conditions (52%), the cost of housing (48%), and the current level of interest rates (33%).
Investor Optimism Increases Slightly
Investor optimism improved slightly in February. The UBS/Gallup Index of Investor Optimism now stands at 82, up from 76 in January and 79 in December. More importantly, however, investors remain significantly less optimistic today than they were a year ago, when the Index stood at 97.
February's increase in optimism came equally from both dimensions of the Index. The Personal Dimension is now at 62 -- the same as its December level, and up from 59 in January. The Economic Dimension also saw a three-point increase, to 20 from 17 in January. The Economic Dimension remains 10 points below its level of a year ago.
Last Thursday, Saudi Arabia's oil minister, Ali al-Naimi, told CNBC that oil would probably trade between $40 and $50 a barrel during 2005. This suggests that, contrary to what has been said in the past, the Organization of Petroleum Exporting Countries (OPEC) is satisfied with energy prices in this very high range. It also suggests that the recent oil prices of more than $50 per barrel -- although higher than the projected range for 2005 -- may not be merely a speculative blip.
At the same time, the Energy Department's Energy Information Administration (EIA) reported that regular gas averaged $1.905 a gallon in the United States at the beginning of last week. The EIA went on to say it expects spring gas prices to peak somewhere close to the highs seen last spring ($2.064 in May 2004). Obviously, gas prices are expected to go up over the next couple of months.
On Friday, the Dow hit its highest level of the year as energy stocks surged in response to the forecast of strong energy prices throughout 2005. Like the slight improvement in investor optimism recorded in February, however, this may be a temporary phenomenon.
The previously mentioned polling data show that about 9 in 10 investors say energy prices are harming the investment climate. This suggests that continuing high oil prices and the potential for increasing gas prices may already be dissipating February's small increase in investor optimism. More importantly, the data point to a decline in investor optimism in March similar to the decline that took place a year ago.
Beware of the New AlchemistsThe U.S. economy's good performance in 2004 despite high energy prices has some observers suggesting that energy prices no longer have the same negative impact on the economy as in the past. Why can't the economy continue to grow and inflation remain under control even with $50-a-barrel oil?
What this analysis neglects is the extremely stimulative monetary policy that existed during 2004. Investors are growing more alert to the dangers to the investment climate associated with the dollar's declining value. The UBS/Gallup poll, however, suggests that investors may not be similarly focused on the potential future economic impact of the higher interest rates needed to defend the dollar.
As in the past, high energy prices will reduce the disposable incomes of consumers this year, while increasing interest rates will raise the cost of borrowing. Given the combined effects of these two trends, it is hard to see how consumer spending in 2005 can continue at last year's pace. In sum, investors have good reason to be concerned about the continuation of high energy prices this year, as do their consumer counterparts.
Survey Methods
Results for the Index of Investor Optimism -- U.S. are based on telephone interviews with a randomly selected U.S. sample of 802 adult investors, aged 18 and older, with at least $10,000 of investable assets, conducted Feb. 1-20, 2005. For results based on this sample, one can say with 95% 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.
