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Optimism Fizzles on Stock Market Prospects

Optimism Fizzles on Stock Market Prospects

by Raksha Arora

Stock market indexes have faltered in recent weeks as wide-ranging investor concerns caused a pull back in valuations. Job growth seems to no longer be in question, but the list of investor worries is hardly shorter than it was during the long months of the jobless recovery. The situation in Iraq is an ongoing source of trepidation, interest rates are sure to rise, and oil prices seem to be moving to higher equilibrium levels. The outlook for equity markets remains uncertain, and results from the latest UBS/Â鶹´«Ã½AV Index of Investor Optimism survey* show that since the beginning of the year, investors have grown increasingly pessimistic about the prospects for stock market performance.

Ratings of Stock Market Performance

Each month, Â鶹´«Ã½AV asks investors to rate prospects for stock market performance over the next 12 months, and investors respond on a 5-point scale with answers ranging from "very optimistic" to "very pessimistic." Subtracting the percentage of investors who express pessimism from the percentage who express optimism provides a "net optimism" measure of investor attitudes about stock market performance.

It appears that net optimism was riding high in January 2000, reaching a peak of +57 (68% optimistic, 11% pessimistic). Net optimism from that point declined (although optimism surged relatively after the Sept. 11 terrorist attacks) until the middle of 2003.  From that point, optimism rebounded and nearly reached its January 2000 heights again in January 2004 (+49 net optimistic). However, that rebound has since fizzled, and net investor optimism for stock market performance has fallen 28 percentage points to +21 this month (51% optimistic, 30% pessimistic).

Stock Market Returns Over the Next 10 Years

Investors are less optimistic about stock market performance over the next year, and they also seem to have lowered their expectations for annual stock market returns over the next decade. Over the course of 2002, investors expected annual stock market returns of 17.6% over the next 10 years, based on an average of five measurements taken by Â鶹´«Ã½AV that year. Expectations were lower in the April 2003 poll, at just 14.9%. The latest expectations, from the March and May surveys, average just a 12% return over the next 10 years, a seven-year low.

According to the May 2004 investor optimism survey, investors are currently predicting an 11.7% return over the next 10 years. To put these numbers in perspective, over the seven years that Â鶹´«Ã½AV has asked this question, the average 10-year return expected by investors has been 15.7%.

Bottom Line

Data from the latest UBS/Â鶹´«Ã½AV Index of Investor Optimism survey indicate that investors are less hopeful for stock market prospects over the next year. About half of U.S. investors -- 51% -- still express some degree of optimism, but that represents a substantial drop from the two-thirds (67%) who did so in January. In the past, stocks have tended to perform well in election years. However, if investors continue to lose confidence in the equity markets at this rate, 2004 could be the exception to the rule.

*Results for the total dataset are based on telephone interviews with 806 investors, aged 18 and older, conducted May 1-16, 2004. For results based on the total sample of investors, one can say with 95% confidence that the margin of sampling error is ±4 percentage points.


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