U.S. Investor Optimism Soared Before Market Turned

PRINCETON, NJ -- Before the recent stock market downturn, U.S. investors' optimism had soared. The Wells Fargo/Gallup Investor and Retirement Optimism Index increased to 43 in May, from 31 in March and -8 last November. Prior to the downturn, investors were about as optimistic about the investment climate as they have been at any time in several years.

The Wells Fargo/Gallup Investor and Retirement Optimism Index, conducted quarterly, is a broad measure of investor perceptions that tends to be a precursor of economic activity. The current survey, conducted May 16-27, included a random sample of 1,426 investors.

The index peaked at 178 in January 2000, just before the dot-com bubble burst, and hit a low of -64 in February 2009, just before the equity markets bottomed out in March 2009.

Fifty-four percent of investors say now is a good time to invest in the financial markets, up from 51% in March and 39% in November 2012. Still, in a separate question, 62% of investors anticipated a market correction that would take back significant market gains later this year. Despite that expectation, only 16% of those who expected a correction say they shifted into safer investments, while 80% made no changes to their portfolio's composition.

Investors' Top Worries Still Involve Politically Divided Gov't, Federal Deficit

Investors are most likely, on a list of 10 specific issues, to say the greatest challenge they are facing is "a politically divided federal government," with 73% saying it is hurting the current investment climate "a lot." This item has been near or at the top of investors' concerns since September 2011.

The federal budget deficit is investors' second-greatest concern, with 67% saying it is hurting the investment climate a lot; this has been near the top of investors' worries over the past 2 1/2 years. Unemployment is investors' third-highest concern, with 55% saying it is hurting the investment environment a lot -- little different from the 53% of March, but well below its September 2011 peak of 83%.

After these three concerns, investors say energy prices, at 53%, are hurting the economy, and then the financial condition of state and local governments, at 50%.

Implications

Investors' optimism is consistent with Gallup's measure of economic confidence that reached a new monthly high in May. The surging stock market and increasing home prices seem to have improved confidence last month to levels not seen since before the recession and financial crisis of 2008-2009.

At the same time, it is not surprising that the markets are taking a tumble not long after many average investors got optimistic about them. Average investors often seem to be the last to jump on the bandwagon on the way up, and tend to be last to get off as the markets correct. That is, by the time there is a general consensus that the markets are improving, they are often peaking. And, by the time the need to get out of the markets is obvious, many savvy investors have already left.

Investors' concerns about a politically divided federal government are also consistent with Gallup's recent polling concerning the problems facing the country. While political battles have been less intense since the presidential election, it seems clear from Americans' most recent rating of Congress that there is a lot of frustration about inaction in the nation's capital. These concerns may increase in the months ahead as Congress faces the need to increase the debt ceiling and approve a federal budget.

Still, the way the markets have responded to the FOMC (Federal Open Market Committee) and Federal Reserve Board Chairman Ben Bernanke's press conference this week may increase investors' concerns about Fed policies and interest rates -- things that have been off investors' radar for a long time. Recognition that Bernanke will be leaving after his term finishes in January may further intensify these concerns during the months ahead.