Investor Optimism Leaves Some Worried

by Hal Plotkin
Silicon Valley Correspondent
Aug 6 1999 4:00PM ET

Despite the market's volatility this summer, investor optimism measured in July hit record levels last month and the danger exists of a big mismatch between expectations and reality.

Fully three-quarters of investors surveyed in July say they are optimistic about achieving their investment goals in the coming year. The survey was conducted as part of a joint effort by PaineWebber, Inc. and the Gallup Organization.

Overall, investors surveyed say they expect a return of 16.6 percent, a record high, over the next 12 months, up from 14.9 percent in June.

Investors likewise have high hopes for long-term market gains, defined as more than 10 years, counting on 16.2 percent compounded growth, up from 15.6 percent the previous month.

Source: Gallup Organization

Investors who have invested for five years or less have by far the biggest field of dreams.

They expect short-term returns of 21.1 percent over the next twelve months and 22.6 percent, compounded, over the next ten years.

"This confirms what I have been saying," says Ralph Bloch, chief market analyst at Raymond James & Associates. "The so-called baby boomers who have gotten into the stock market are the most arrogant group I’ve ever seen in my forty years in the business. I don’t know what they’re smoking, but it must be some very good stuff."

The PaineWebber Index of Investor Optimism survey was based on calls made during the first two weeks of July to 1,005 investors with portfolios of $10,000 or more, randomly selected from across the country.

 PaineWebber's Index of Investor Optimism
 Read the Gallup Organization's Press Release

Bloch says he doesn’t buy what he calls the "Goldilocks theory" that low inflation, low interest rates, and moderate growth will sustain recent record market returns.

Instead, he says overly rosy recent market forecasts remind him of the blue-sky projections that were made for small caps and Asian equity markets just a few years ago.

Bloch keenly remembers one prominent analyst calling Asian stocks "shells on the seashore" that should quickly be scooped up. "If you listened to those fools, you lost your shirt," he says.

Other analysts agree that the market’s recent performance is largely without precedent.

"The historical average of roughly 10 percent annual returns goes back to the early 1900’s," says Manish Kumar, an analyst at Lehman Brothers.

Over the last few years, Kumar says, domestic equities have averaged closer to 25 percent annual returns. Roughly speaking, those equity prices reflect about 25 times profit/earnings numbers, a ratio Kumar says does not leave much headroom.

"I don’t know when the superior returns will cease," he says. "I suppose those numbers could go higher, maybe as much as 10 or 11 percent." Even so, Kumar expects overall market returns will eventually retreat to more historical levels.

Unrealistically high hopes are also troubling to executives at the company that sponsored the survey.

"The unbridled expectations for return, especially among younger and less experience investors, is unsettling because most of them have never truly experienced a sustained market correction," said Mark B. Sutton, president of PaineWebber’s Private Client Group, in a report that accompanied the release of the data.

According to Bloch, a veteran technical analyst, current high expectations are a "screaming technical negative."

He says sentimental indicators provide useful information to contrarians who put more faith in technical analysis than in attempts to understand less tangible and more fluid factors such as overall market psychology.

"That’s one of the reasons I shifted 43 years ago from fundamental analysis to technical," Bloch says. "It’s not a perfect discipline, none of them are, but it’s a lot better."

Bloch, like Kumar, agrees that investors should base their long-term expectations on more historical patterns.

So what is Bloch’s prediction for the stock market over the short-term?

"I haven’t a clue," says Bloch, not known for mincing words. "And neither do the others. They’re just a whole bunch of fools who think they can do it."