U.S. Investors Grow More Pessimistic as Fiscal Cliff Looms

U.S. Investors Grow More Pessimistic as Fiscal Cliff Looms
The Wells Fargo/Gallup Investor and Retirement Optimism Index turned negative at -8 in November, down from double-digit positive scores earlier in 2012. Investors are now as pessimistic about the economy as they were a year ago after the debt ceiling debate, when the index was at -9.

The Wells Fargo/Gallup Investor and Retirement Optimism Index is a broad measure of investor perceptions that tends to be a precursor of economic activity. This quarterly survey was most recently conducted Nov. 9-17, 2012, with a random sample of 1,024 investors. The index peaked at 178 in January 2000, just before the dot-com bubble burst, and hit a low at -64 in February 2009, just before the equity markets hit bottom in March 2009.

One reason for the current increased pessimism is the looming fiscal cliff. In mid-November, 69% of U.S. investors thought the fiscal cliff was already slowing the economy. Seventy percent believed going over the cliff would send the economy into another deep recession in 2013.

Two in Three Say Politically Divided Federal Gov't, Federal Deficit Hurting Investment Climate "a Lot"

Investors point to a politically divided federal government (69%) and the federal budget deficit (69%) as top factors affecting the U.S. investment climate, saying they are hurting it "a lot." Close behind are the unemployment rate (67%) and the global economic slowdown (63%). Investors are less concerned about credit availability and home values.

New Jobs and Federal Deficit Are Top Priorities for 2013

Investors are acutely aware of the impact of this year's presidential and congressional election results, with eight in 10 saying those results will have a major (43%) or minor (37%) impact on their net worth. Investors say the top priorities for the president and Congress in 2013 should be creating new jobs, at 89%, followed by addressing the federal deficit and federal debt, at 82%. Addressing international terrorism (68%), developing a new federal tax policy (63%), strengthening Medicare and Medicaid (60%), and strengthening federal support of education (59%) round out investors' top priorities.

Implications

Investors are greatly concerned about today's politically divided federal government as reflected by their ranking it as one of the two top factors hurting the U.S. investment climate a lot. In turn, they seem to recognize the resulting difficulty in making things happen in the nation's capital. They are also worried about the fiscal cliff and its future, as well as current, economic impact. The flood of special dividends by the nation's corporations is an obvious example of corporate tax management in anticipation of higher taxes on future dividends. Similarly, individual investors are bringing income into 2012 in anticipation of higher capital gains taxes next year. Less obvious are the ways companies are putting their capital investment and hiring decisions on hold as the fiscal cliff approaches.

In this regard, the fiscal cliff issue has not yet reached the level of concern exhibited last year regarding the federal debt ceiling. Just after the peak of that confrontation in Washington, D.C., investor pessimism reached -45 -- far worse than the current -8 reading. Still, there are several weeks left in the year for the fiscal cliff debate, and investor optimism could decline further if the nation goes over the cliff.

Regardless, it is important to note that -- unlike the debt ceiling -- any fiscal cliff agreement will have real-world consequences for the average American. These could include significant tax increases not only on those with higher incomes, but also in terms of payroll taxes, dividend taxes, and capital gains taxes on those in other income categories. Further, significant cuts in federal expenditures for defense, unemployment insurance, and other government programs could also be included.

In turn, these potential tax increases and spending cuts are likely to slow consumer and business spending in the already stalling economy of late 2012. As investors note, the fiscal cliff is already affecting the U.S. economy. No matter how it is resolved, the fiscal cliff is also likely to affect early 2013.
From: http://www.gallup.com
Updated: December 12, 2012