Investor Confidence in the Stock Market and Small Business

By at 22 December, 2020, 3:11 pm

by Raymond J. Keating-

A week before Christmas, Gallup released the latest Wells Fargo/Gallup Investor and Retirement Optimism Index. While the Index moved up recently and so has the stock market, investor confidence remains well below pre-pandemic levels. However, it is important to understand that stock prices are forward looking, and also to note what investors are saying about a post-pandemic economy, including small businesses.

Gallup noted that the Index “stands at +42 in the fourth quarter. This is up from +18 in the third quarter and +4 in the second. Still, investor confidence remains well below the +138 recorded in the first quarter of the year, before the coronavirus pandemic forced unprecedented economic shutdowns.” (See the following chart from Gallup.)

As for the investor take on some key economic factors, it was reported:

“At -3, investors’ net optimism about unemployment remains down 50 points since right before the pandemic when it was +47. But it has improved considerably from -35 in Q2.”

In addition:

“Net optimism is down 24 points on economic growth as well as inflation, although the outlook for inflation (-21 net optimistic) is significantly worse than for economic growth (+13).”

As for the stock market, Gallup summed up:

“U.S. investor optimism has improved incrementally each quarter and is far from recovered from the pandemic shock. Investors remain broadly confident in the stock market as a place to invest… While investors were initially focused on the risks to short-term market gains, they are now showing reduced confidence in its longer-term performance as well.”

There is some contradictory information in the Gallup polling results, such as when it comes to long-term confidence in the stock market. While 65 percent view investing in the stock market as a way to build wealth for retirement, at the same time, those optimistic about reaching their 5-year investment goals is down from 57 percent in the first quarter to 2020 to 38 percent in the fourth quarter. That latter point on investment goals likely will improve as the economy and investment recover post-pandemic.

This also is a good opportunity to touch on the largely mistaken idea that there is a contradiction between the stock market and the real economy. This accusation or assumption ignores that stock prices are forward looking. It is not surprising to see the general recovery in stock prices in recent months given that such investment is looking ahead in time, in particular, the recovery in business and the economy post pandemic.

Given that small businesses generally don’t trade publicly, it’s difficult to get a forward-looking gauge on small business. The best we probably have is the Russell 2000, which is an index of 2,000 smaller public traded U.S. companies.

Along with the rest of the stock market, the Russell had fallen dramatically when the pandemic hit, declining to 991.2 in mid-March. But the Russell 2000 closed at 1,970 on December 18. That was above its pre-pandemic levels. In fact, the performance of the Russell 2000 has run well ahead of the Dow Jones and the S&P 500 over these past nine months.

That says something about confidence in smaller businesses on the other side of this pandemic economy.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.



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