Perception can be a slippery thing—it's colored by experiences and clouded by feelings. And when it comes to investing, how things seem and feel is often far from how they really are. Over the past year, the US economy has logged real growth and global stocks have risen significantly—but don't ask the average investor. He's sipping a tall (half empty) glass of pessimistic perception.
According to a national Bloomberg poll conducted in mid-March, Americans (by almost 2-to-1) think the economy has worsened over the last year, and 70% of those who own stocks, bonds, or mutual funds don't believe the value of their portfolios has risen at all since March 2009.
Let's get this straight: The US economy posted a fourth quarter annual growth rate of 5.6%, the S&P 500 is up 79.5% off the bottom, the MSCI World is up 81.3%* over the same period—and the economy has worsened while portfolios haven't risen a lick?! The recent stock market recovery has been more or less consistent across countries, sectors, and industries. Unless, 70% of American investors own only the relatively few stocks suffering losses since last March or are only in cash and Treasuries, then they've almost inevitably seen portfolio increases—whether they feel they have or not.
For those who exclusively follow markets and the economy, this stat may seem preposterous—but for those who also study sentiment, it's very telling. Steadfast skepticism isn't a new phenomenon—such skewed perceptions are typical of nascent economic recoveries and new bull markets. After a severe recession and seemingly ruinous bear market, persistent pessimism is understandable, if misguided. Prime example: Unemployment is still high and felt acutely by many (directly or indirectly)—for more than half of Americans polled in the Bloomberg survey, this was their chief concern.
Undeniably, unemployment is real problem, but it's also a problem of perception—when investors see so many out of work, they assume it means the broader recovery is stuck in neutral. In fact, after a recession, the economy can grow for quite awhile before hiring catches up. Always been that way. And remember, unemployment is elevated, but job losses have recently slowed, even reversed—162,000 jobs were added in March—and the unemployment rate has decreased from a peak 10.2% to 9.7%. May just be me, but that seems like improvement.
As investors eventually begin to shake off the perception they're stuck in a black hole, they may realize this recovery isn't a myth after all. Companies are sitting on cash reserve levels not seen since the 1950s, and hard-hit business investment has a lot of room to rebound. Inventory restocking will likely continue pushing manufacturing to the forefront. Cost-efficient firms will continue growing profits. All this will be supported by resurgent global trade.
Is it a problem the majority of Americans don't believe in this recovery? Nah, it's bullish! Stock markets love to climb that wall of worry. Improving fundamentals will drive growth, and the economy—led by the stock market—will likely continue its upward trajectory. Granted, there have been some hiccups along the way (heard mention of sovereign debt?) and there will undoubtedly be more ahead.
But when the excuses run out; when you, your neighbor, your mother, and the stranger on the street can't get enough of just how darn great the market is doing; when you're sure you've got this stock business all figured out—then it's finally time to worry! Euphoria has set in, and the market's likely overshot.
So as the headlines keep serving up generous helpings of skepticism, with a few dashes of downright pessimism—you won't hear me complaining.
* Source: Bloomberg Finance LP; as of 4/9/2010