Gallup/UBS "Index of Investor Optimism -- U.S." poll data collected Feb. 1-17 show overall U.S. investor optimism plunged to 92 in February, losing almost all of its January gain. Meanwhile, "Index of Investor Optimism -- EU5" poll data show that European investor optimism also dropped sharply, from 40 in January to 20 in February.
These declines are not surprising given what investors are telling Gallup about how they view the Enron debacle. For example, more than three out of four American investors (79%) say that questionable accounting practices in business are hurting the U.S. investment climate. Of those, 30% say such practices are hurting the investment climate a great deal, while 56% say they are hurting a moderate amount (the rest say "only a little"). Obviously, Wall Street has good reason to worry about the negative impact Enron is having on U.S. investors and the stock market. Unfortunately, the negative impact of Enronitis may spread far beyond Wall Street, infecting not only Europe, but investors worldwide.
Negative Wealth
Of course, these sharp drops in investor confidence are not encouraging given the leading economic indicator status of the "Index of Investor Optimism -- U.S." The drop in investor optimism in February suggests that the hoped-for economic upturn could be dissipating before it gains any real momentum.
Worse yet, the largest part of the decline in optimism in the U.S. came along the personal dimension, as it fell from 85 in January to 69 in February. The personal dimension of the Index, which includes questions about investors' expectations for their personal financial situation, is now at its lowest point since Sept. 11. The personal dimension of the "Index of Investor Optimism -- EU5" also fell seven points to 37 in February. Arguably, this means that investors in the U.S., Europe, and possibly worldwide are feeling a lot less wealthy now than they were just a month ago. This feeling could generate a negative "wealth effect" -- a decrease in consumption and economic activity.
Biggest Drop Among Substantial U.S. Investors
Importantly, the decline in optimism among "substantial" U.S. investors -- those with $100,000 or more of investable assets -- was even more pronounced than it was for U.S. investors as a whole. Overall, the optimism index among substantial U.S. investors fell from 135 in January to 99 in February bringing it close to its October 2001 level (98). The personal dimension for substantial U.S. investors fell from 95 in January to 74 in February, its lowest level since September. The economic dimension for substantial U.S. investors also declined from 40 in January to 25 in February.
It appears that the fallout from Enron is having a significant, negative impact not only on the investment climate in the U.S. and Europe, but also on the U.S. economic outlook for the months ahead. This implies a need for caution among business executives as they plan for the expected economic upturn in the coming months. It may also motivate fiscal and monetary policy-makers in the U.S. to reconsider the need for an economic stimulus in light of the potential impact the "Enron effect" is having on the worldwide investment climate.
* Results are based on interviews with 1,001 U.S. investors, aged 18 and older, conducted Feb. 1-17, 2002, and approximately 200 investors each in France, Germany, Great Britain, Italy, and Spain.
