Overall investor optimism remained relatively unchanged in June, according to the latest UBS/Gallup Index of Investor Optimism Poll*. However, underneath this seeming stability lies a significant divergence in views between substantial investors (investors with $100,000 or more in investable assets) and average investors (those with between $10,000 and $100,000 in investable assets). Among substantial investors, optimism surged to its highest level since February, while average investor optimism tumbled to its lowest level in two years.
Econometric analysis suggests the substantial investor optimism level is often a better predictor of the economy's future direction than that of average investors. On the other hand, a recent Gallup Poll** gauging the attitudes of all U.S. consumers reveals a lack of confidence that could imply lackluster retail sales in the coming months. Which group is right? The answer may determine whether some major retailers reach their sales forecasts this summer.
Substantial Investor Optimism Surges, Average Investor Optimism Falls
Optimism among investors overall remains weak. It increased slightly in June, rising from 50 in May to its current reading of 54. However, the Index remains near its lowest level of the past two years.
But among substantial investors only, optimism nearly doubled from May to June, increasing from 51 to 91. Substantial investor optimism increased significantly along both the personal dimension of the Index, which measures investors' attitudes toward their own finances, and the economic dimension, which measures investors' attitudes toward the economy as a whole.
Average investor optimism fell 15 points in June, decreasing from 49 in May to its current level of 34. Just as substantial investor optimism increased along the personal and economic dimensions of the Index, average investor optimism decreased along both dimensions.
More Bad News For Retailers
The declining gas prices during April and May led many economic observers to conclude the slowing of the economy this spring was only a brief, temporary phenomenon. Federal Reserve Board Chairman Alan Greenspan noted the following in his June 9 testimony before the Joint Economic Committee: "Over the past year, the pace of economic activity in the United States has alternately paused and quickened. The most recent data support the view that the soft readings on the economy observed in the early spring were not presaging a more-serious slowdown in the pace of activity."
Presumably, a large number of substantial investors share this view, as reflected by their surge in optimism this month.
The problem is, prices at the pump are increasing again and oil prices remain in the $50- to $60-a-barrel range. As a result, much of the "recent data" Greenspan cited on June 9 may already be out of date. For example, Gallup's June 16-19 poll shows only 35% of consumers say economic conditions are "getting better," while 57% say conditions are "getting worse."
More importantly, while the sample size is small, Americans with household incomes of $100,000 or more are about evenly split as to whether they think economic conditions are getting better or worse. In sharp contrast, those in lower income households are much less optimistic about the future direction of the economy.
In sum, it looks like middle and lower income consumers are likely to cut back on their purchases this summer as higher gas prices reduce their disposable income. Soon, Americans may see retailers, particularly those serving low and moderate income consumers, adjusting their sales expectations downward once more.
*Results for the Index of Investor Optimism Poll are based on telephone interviews with 804 investors, aged 18 and older, conducted June 1-19, 2005. For results based on the total sample of investors, one can say with 95% confidence that the maximum margin of sampling error is ±4 percentage points.
**Results for the Gallup Poll are based on telephone interviews with 1,006 adults, aged 18 and older, conducted June 16-19, 2005. For results based on the total sample of adults, one can say with 95% confidence that the maximum margin of sampling error is ±3 percentage points.
