Reuters reports that a new survey indicates that investors are more optimistic that the stock market will rise than they have been in the past two years. That’s good, right? Maybe. If business can support that optimism, then yes: that’s great. But if they’re just inflating another bubble, then no: that’s not so great. Let’s look at what the Reuters survey says.
The probability of further gains in stocks, even after a spike of more than 65 percent on the S&P 500 from its lows last March, was judged as more likely in January than any time since the end of 2007, data from the Reuters/University of Michigan Surveys of Consumers indicated.
Well that just seems illogical. If the stock market is already up 65%, why would you have a greater expectation that it will increase than when it was only up, say, 5%? As the stock market goes up further, my expectation that it will continue to go up significantly would decline — especially as the nation struggles to pull itself out of a nasty recession.
I still contend that it will be very hard for the U.S. economy to recover much until consumer sentiment improves a lot. Consumer spending accounts for something like 70% of GDP. So for companies to feel the demand necessary to begin hiring, people need to open their wallets. That’s still not happening. While I agree with investors that consumers will come around eventually, I worry that eventually might not be in the near-term.
But investor confidence could help. After all, many regular American consumers also invest in the stock market, either through savings, discretionary income or their 401k. They’re all feeling about 65% better about their wealth now than they were in March. This should help encourage them not to be so wary to spend.
Still, investor optimism isn’t enough. There are other fundamental problems in the U.S. economy that need to be remedied going forward. We need to get financial reform passed, so to avoid another financial crisis. We need to promote fiscal responsibility, on both national and personal levels. For any market rally to endure, the U.S. economy needs to actually heal, not for investors to merely believe that the gaping wound the recession created might not be fatal.
