It has been a tumultuous few years for the American economy, but according to a recent Independent Investor Outlook Report released by the Charles Schwab Corporation (NYSE: SCHW), investors think 2011 is going to shape up pretty well.
The report, based on a survey of nearly 1,400 advisers during late January, found that 56 percent of advisers are feeling bearish towards 2011 and more than 75 percent think that the S&P 500 will rise this year.
First quarter stock market performance appears to support this optimism, with the Dow Jones industrial average up 6.4 percent at the end of the first quarter. Adding to investor optimism is a generally favorable attitude toward the extension of the Bush-era tax cuts in December 2010, and a belief that yields on U.S. Treasury bonds will increase during the first half of the year.
This overall market optimism is in line with growing investor confidence around the globe. According to a recent report issued by the ZEW Center for European Economic Research, European investors are more optimistic about 2011 as well, with major economies such as Germany seeing a decrease in unemployment and many European Union companies benefiting from increased exports to foreign markets such as China.
There are still some areas where investors are less optimistic. Nearly 40 percent of respondents in the Schwab study think the housing market will continue to weaken in 2011. While that is slightly better than investor sentiment in the summer of 2010, it still represents a big area of uncertainty that could drag consumer spending down and continue to make it difficult for certain sectors such as construction to fully recover. And while 68 percent think that consumer spending will rise, there are real concerns about inflation, with 64 percent predicting that inflation will rise.
Energy prices – which rose dramatically in the first quarter of 2011 with oil prices exceeding $100 a barrel – may be one source of this inflation. More than 90 percent of respondents think high energy prices are here to stay, and perhaps even increase in 2011.
From an investment perspective, the biggest shifts in investor thinking pertains to investments in U.S. large cap investments, and both small and large cap international investments. According to the study, investments in U.S. large caps are reaching levels last seen in 2009 and 2007, suggesting that investors are once again feeling confident that the engines of the American economy are poised to perform well in 2011.
As the American and global economies slowly get back on track, energy and financial services are sectors to the financial advisers polled in the study. However, the recent concerns over nuclear energy in the wake of the Japanese nuclear crisis and ongoing uncertainty about oil investments in a rapidly changing Middle East –- both of which occurred after the study data was collected –- make for mixed attitudes toward energy investments.
While high prices for oil make this an attractive investment and concerns about nuclear power may prompt renewed investor interest in renewable energy sources, sustained high energy prices may hamper economic growth, ultimately driving down demand for energy.
Among Schwab clients, confidence in the markets and overall economy are also growing. Especially when compared to the height of the recession in 2008-09, clients are much more comfortable with their investments and their ability to reach their financial goals.
According to the report, nearly a quarter of clients were more optimistic about their ability to retire on time than in July 2010 and more than half were feeling more optimistic about the performance of the market. Client spending behaviors also indicate renewed vigor in the economy, as they reported that they are three times as likely to spend money on discretionary items in the first half of 2011 as compared to the summer of 2010. Only about one-third reported that they are actively decreasing expenses.
To date, 2011 has included a mixed bag of economic indicators. Stock market rallies and declining unemployment have occurred right alongside drastic shocks to global economic powerhouses, such as Japan and continuing political concern over the U.S. federal budget. Whether investor confidence in the American economy this year is well-founded will be determined in the months ahead as businesses and consumers react to an economic landscape still rife with uncertainty.