The English language is malleable. Not only do new words enter the lexicon and get used to the point they become “official’’ words, but other words with long-standing meaning develop additional definitions over time.
The Merriam-Webster dictionary recently added to their volumes the word “glamping’’, which is defined as “glamourous camping”, a high-end form of experiencing the outdoors. The world of finance and business provides an example of a new definition of an old word with the use of “unicorn”, which is defined as a startup business that gets valued at $1 billion or more.
At Spectrem, there are two words that we discuss every month: “confidence” and “outlook”. We publish our Investor Confidence Indices monthly to determine how confident investors are about the current market for stocks, mutual funds, bonds, and real estate. That report includes the Affluent Household Outlook, which asks investors their level of optimism toward the current state of the economy, their household assets and income, and the company for which they work or worked.
“Confidence’’ and “outlook’’ are two words which relate but they are not identical in meaning. An investor can have a positive outlook about the economy but not be particularly confident in the stock market. An optimist can still tell when things aren’t going well.
Advisors can learn much about their clients by inquiring about their confidence in the stock market and their outlook for the future, and can certainly advise investors accordingly, or can try to change their level of confidence or level of optimism when they feel it is beneficial to do so.
Spectrem’s Investor Confidence Index, which was created in 2007, operates on a scale from 51 to (-51). Positive numbers indicate a bullish attitude toward the stock market. The Spectrem Millionaire Investor Confidence Index (SMICI®), for investors with $1 million or more in investable assets, was at 6 in March, but it reached its peak of 25 in March and April of 2004. Its lowest mark of -39 was in November of 2008, as the Great Recession was reaching its greatest impact on the nation. The SMICI was in negative territory for 33 months during that period.
The SMICI has been in positive territory continuously since January of 2016, the month Donald Trump was inaugurated. However, the Spectrem Affluent Investor Confidence Index (SAICI®), which measures the confidence of investors with a minimum of $500,000 in investable assets, is never as high as the SMICI and was in negative territory as recently as this January, and currently sits at 3. Since the SAICI includes the responses from the millionaires measured in the SMICI, those with under the $1 million in investable assets are far less confident in the market.
Advisors need to regularly monitor the confidence of their clients, and that is probably more true now than ever before. The market is more responsive than ever to government maneuvers, and our recent survey asking investors to place the logic of the stock market on a 100-point scale from 0 to 100 placed it at 43.16! That’s an indication that investors do not consider the stock market results to be a rational measure of the economy. That does not mean they don’t invest according to Dow Jones or NASDAQ results, but they may not have a lot of confidence in the significance of the numbers.
And confidence level changes dramatically, especially among the Millionaires in the Spectrem indices. The SMICI was at 20 in August of 2018, and dropped to 1 by December. That’s a radical dip in investor confidence.
The Affluent Household Outlook operates on a scale from 100 to (-100) and like the Confidence indices reflects how investor feel current economic conditions impact their household finances. It is not a measure about the stock market; it is more aimed at the ins and outs of operating a household budget and the company for whom investors work.
The Outlook is a measure of optimism versus pessimism, and advisors absolutely must know the overall outlook of their clients. Are they generally optimistic about their household finances, or are they always looking for the next event that is going to negatively impact their personal fortunes?
The overall Outlook in March was 21.6, with Household Assets as the highest component and the Economy as the lowest. The last time the Outlook was in negative territory was in February of 2013, and it was up to 30.2 as recently as September.
There is no arguing economic conditions are relatively positive today. The stock market is still close to its all-time highs. Unemployment is remarkably low. Conditions exist that should create both an optimistic outlook and high level of confidence.
But investors are not like the stock market. There is some rational to how they feel about current economic conditions. Advisors need to be aware of what outside factors impact an investor’s confidence or outlook to better determine how to proceed with investment decisions in accordance with those emotions.
©2019 Spectrem Group