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Investors Riding High on Good Economic News

Investors Riding High on Good Economic News

by Raksha Arora

The financial markets had much to be thankful for last week -- nearly every economic release came in above estimates. The week began with Monday's announcement that the UBS/Â鶹´«Ã½AV Index of Investor Optimism had hit a 20-month high -- representing a surge in investor confidence. This report was followed by the Conference Board's statement Tuesday that its Consumer Confidence Index had reached 91.7 in November -- a 14-month high point that substantially exceeded forecasts. Then came the news that weekly jobless claims had fallen to a 33-month low and the gross domestic product figures for the third quarter had been revised upward from 7.2% -- already hailed as the fastest economic growth in two decades -- to 8.2%.

But amid the abundance of good news on the economic front, questions remain as to how sustainable this momentum is.

Prospects for Economic Growth

Â鶹´«Ã½AV asks U.S. investors each month for their outlooks on economic growth. In November 2003*, 57% of all investors surveyed said that they were either very optimistic or somewhat optimistic about prospects for economic growth over the next 12 months. In recent months, optimism about economic growth has been increasing steadily; November saw a jump of seven percentage points in the number who said they were optimistic.

At the beginning of the year, investors were almost equally divided: 42% were optimistic and 40% were pessimistic. By March 2003, the outlook further soured -- the percentage of investors who were pessimistic had climbed to 50%, while the number of those who were optimistic had declined to 34%. Today, nearly twice as many investors are optimistic as are pessimistic.

And the optimists are looking smart at the moment. When the Bureau of Economic Analysis released its preliminary growth estimate of 7.2% for third-quarter GDP, naysayers warned that it was sure to revise that figure downward. However, just the opposite occurred: The estimates based on more complete information put GDP growth at an even speedier pace than was originally celebrated.

But while the good economic news is currently in line with investor sentiment, quarterly growth of 8.2% can hardly be the norm going forward and the pessimistic holdouts may yet have their day. Consensus forecasts for GDP growth in the fourth quarter are in the range of 4%, and the bottom line is that while the recovery may be sustainable, this pace of economic growth is not.

*Results for the Index of Investor Optimism -- U.S. are based on telephone interviews with a randomly selected U.S. sample of 801 adult investors, aged 18 and older, with at least $10,000 of investable assets, conducted Nov. 1-13, 2003. For results based on these samples, one can say with 95% confidence that the maximum error attributable to sampling and other random effects is ±4 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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