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U.S. Investor Optimism Surges Upward

U.S. Investor Optimism Surges Upward

by Dennis Jacobe

GALLUP NEWS SERVICE

Only one in three Americans (36%) believe the war in Iraq is over, according to an April 22-23 Â鶹´«Ã½AV Poll. Still, President Bush is reportedly going to announce a "victory" of sorts -- perhaps an end to major fighting in Iraq -- later this week. In turn, this raises a key economic question: "Will ‘victory' in Iraq jump-start the U.S. economy?"

So far, Â鶹´«Ã½AV's consumer confidence data has not been all that encouraging in this regard. Consumer sentiment went up as the war with Iraq began. But the increase seemed to dissipate somewhat in early April. The net result has been only a modest increase in consumer confidence in April over the pre-war March lows. Significantly, this reading of consumer confidence is totally consistent with the relatively modest political "rally effect" that the president enjoyed during late March and April.

U.S. Investor Optimism Soars in April

On the other hand, U.S. investor optimism truly soared this month. The Index of Investor Optimism -- a joint effort of UBS and The Â鶹´«Ã½AV Organization -- surged 61 points in April and now stands at 66. This is the largest increase in the Index since its inception in October 1996. And the data suggest that investor optimism increased not only during the early days of April but also following the fall of Baghdad on April 9.

During the first half of March and prior to the invasion of Iraq, investor confidence had fallen to 5 -- the lowest point in the Index's six-year history. The record April surge in the Index brings it close to its June 2002 level of 72. This is a sharp improvement, but is still below the 89 of a year ago and far below the 121 of March 2002.

The Personal Dimension of the U.S. Index increased 22 points in April -- also its biggest increase to date -- and now stands at 57. This is its highest level since June 2002, when it stood at 61, but is still below its 66 of last April and 80 of March 2002. The sharp increase in this dimension of the Index suggests that investors are now much more optimistic overall about their personal financial situations than they were prior to the start of the war with Iraq.

The Economic Dimension of the U.S. Index increased a record 39 points in April, to 9. This suggests that investors have once again turned slightly positive about the economic outlook for the next 12 months. Prior to the war, investors were decidedly negative about the economy, with the Economic Dimension of the Index at –30 -- its lowest level ever.

Index of Investor Optimism
January 2000 – April 2003

Why the Big Increase in Investor Optimism?

Why is investor optimism reflecting a much stronger war "rally effect" than is consumer confidence? Most likely this is a result of the way the equity markets deal with uncertainty: they simply don't handle it well. For the markets, not knowing what might happen leaves investors exposed to all sorts of potential disaster scenarios, ranging from the destruction of Iraq's oil fields to the use of weapons of mass destruction. However one might describe current conditions in Iraq, we know that this long list of potential terrible events did not take place -- which clearly had a positive impact on investor optimism.

Further, just before the war started, the markets began to anticipate U.S. success in Iraq. As a result, oil prices plunged and equity prices surged. Because the equity markets have largely been able to maintain those gains in April, investors have good reason to be more optimistic about the value of their portfolios now and in the future.

Finally, investors and the markets try to look ahead and anticipate how the economy will be doing 6 to 12 months in the future. And with the success in Iraq, a lot of investors think the economy and the markets are going to be doing much better in the future:

  • 71% of investors think a "moderate" or "strong" recovery best describes prospects for the U.S. economy over the next year.
  • 66% of investors think the stock market will be higher in a year than it is now, while only 8% think it will be lower.
  • 54% of investors think now is a good time to invest in the financial markets.
  • 54% of investors think the war will have a positive impact on the economy.

Will Investor Optimism Jump-Start the Economy?

Probably the best argument that success in Iraq will provide a "jump-start" for the economy relates to the so-called investor "wealth effect." The idea is that higher equity prices and an improved stock-market outlook will make consumers feel wealthier. As a result, they will be more willing to spend -- particularly on consumer durables. This seemed to be the case as the markets boomed in the late 1990s. Whether it will work in response to the success in Iraq is much less clear.

Of course, another possibility is that growing investor optimism will spread to the more general consuming public over time. In this regard, the April 22-23 Â鶹´«Ã½AV Poll provides some reasons for hope:

  • 52% of the public says the U.S. involvement in the war against Iraq has had a positive effect on life in the United States generally, while only 18% say it has had a negative effect.
  • 37% of Americans say the U.S. involvement in the war has had a positive effect on them personally, compared to only 16% who say it has had a negative effect.
  • 33% of consumers say they have been less willing to spend money in the past few months because of the war with Iraq and economic hard times.
  • 32% of consumers say that now that the war is over -- at least the heavy fighting -- they are more willing to spend money.

In sum, today's much greater investor optimism may just stimulate further increases in consumer confidence in the weeks and months ahead. And that is necessary -- although it may not be sufficient -- to jump-start the U.S. economy and get us out of the "jobs-recession" of the past several quarters.

Survey Methods

Results for the "Index of Investor Optimism -- U.S." are based on telephone interviews with a randomly selected U.S. sample of 1,004 adult investors, 18 years and older, with at least $10,000 of investable assets, conducted April 1-16, 2003. Results for the Â鶹´«Ã½AV Poll of April 7-9, 2003 are based on random telephone interviews with 1,018 national adults, aged 18+; results for the Â鶹´«Ã½AV Poll of April 14-16, 2003 are based on random telephone interviews with 1,011 national adults, aged 18+; and results for the Â鶹´«Ã½AV Poll of April 22-23, 2003 are based on random telephone interviews with 1,001 national adults, aged 18+. For results based on these samples, one can say with 95 percent confidence that the maximum error attributable to sampling and other random effects is ±3 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.


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