Investors Are Bullish All Over Again. It's Not Just Irrational Exuberance

Optimism is back in style. The number of Americans who think stocks will go up in the coming year is back to the bull-market highs of the late 1990s, according to the annual BusinessWeek/Harris Poll. This year, a surprisingly high 54% of the public predicted an up year for the stock market, a statistical tie with the 52% who said so in frothy 1999.

Our poll contains other intriguing insights into the public's current thinking. Real estate -- still Americans' No. 1 investment pick -- is less favored than a year ago, seemingly because people see more opportunity in stocks. Investors have regained confidence in their own stockpicking ability. They're less concerned than last year about terrorism's potential impact on stocks. And they expect strong economic growth in the year ahead. They're realistic, though. Their expectations for long-term returns from stocks remain well below the level of the giddy 1990s. And in the wake of the Wall Street scandals, they're more dubious that small investors can do as well as big ones.

Put the sometimes contradictory answers together, and you get a picture of a public that has been immensely cheered by the stock market rally of the past year but doesn't seem to be dangerously euphoric. The telephone survey of 610 adults, including 312 who said they own stocks, was conducted from Dec. 2 to Dec. 8 by Harris Interactive Inc. (HPOL ). The sampling margin of error is plus or minus 4% for all respondents and plus or minus 5.5% for the subset of stock investor responses. Full results are available at

The 54% of households who think stocks will go up in the coming year was a sharp increase from the 41% who thought so last year. The rise in optimism was even bigger for respondents who own stocks. Among them, 67% expected stocks to go up, compared to 47% a year ago.

It's no surprise that Americans still like real estate, since it's the biggest chunk of most households' assets and housing prices have been strong. What's interesting is that the share of all households making it their top pick fell to 46% from 53% last year, when real estate was seen as a refuge from Wall Street's carnage. The dropoff in real estate's popularity among investors was mirrored by a rebound in mutual funds and stocks, which together were the No. 1 choice of 31% of respondents, up from 19% in 2002.

Investors seem to have been reading the headlines about mutual-fund abuses, judging from the increase (to 50%, from 42%) in the share who disagree that small investors can do as well as big investors in the stock market. On the other hand, many remain convinced that they can beat the pros and their fellow dabblers. An overwhelming 75% are confident that the stocks or mutual funds they pick will beat the market averages. That's up from 64% last year. "It's like what Samuel Johnson said about second marriages -- 'the triumph of hope over experience,"' says Laszlo Birinyi Jr., president of Birinyi Associates Inc., a stock market research firm in Westport, Conn.

Taking terrorism in stride?

Despite the mutual-fund scandal, 17% of investors chose mutual funds as the best investment for the coming year, up from 12% last year. Funds also held their own against individual stocks. The 28% who plan to invest more in funds in the next six months are little changed from the 31% who say they will invest more in stocks.

Investors may be taking the scandals in stride because the market is still rising. The same thinking could be at work in the attitude toward terrorism. Asked how "terrorism and the war against it" will affect the stock market over the next 12 months, 24% expect a positive effect and 22% expect no effect at all. That's pretty confident for a nation that suffered the September 11 attacks two years ago and continues to lose soldiers to terror attacks in Iraq. Woody Dorsey, president of Market Semiotics, a Castleton (Vt.) investment research firm, speculates that since stocks have shrugged off terror so far, "people have kind of gotten that out of their system. They're inoculated against it." Only 5% of investors -- down from 12% last year -- called a big stock market crash "very likely."

As an experiment this year, we asked people to predict inflation, interest rates, and economic growth in 2004 -- and then compared their answers with those of the professional forecasters in our Economic Survey. Our respondents were even more bullish on growth than the pros. Yet, somewhat inconsistently, they were less worried that interest rates would rise.

The degree of optimism expressed in our poll worries some contrarian analysts. They fear that investors have already acted on their convictions by putting money into the market, so there's not much upside left. When everyone is upbeat, they say, then the market is "priced for perfection." The only possible change then is that some people turn pessimistic and bail out, sending stocks lower. That's certainly what happened in the bear market that began after the high tide of optimism in December 1999. "There is probably an overconfidence factor," says Dorsey. Adds Tobias Levkovich, chief U.S. equity strategist at Smith Barney (C ): "We've seen a move from fear to comfort, probably on the way to greed."

The contrarians could be right. Still, some answers in the poll suggest that investors remain level-headed: Only 5% plan to invest "a lot more" in stocks or mutual funds in 2004. What's more, their expectations for long-run stock returns (capital gains and dividends) are restrained. Fully 61% expect their returns to average under 10% a year, and only 14% are counting on returns of 12% or more. In 1999, by contrast, just 37% expected sub-10% returns and 27% counted on 12% or more per year.

The modest increase in mutual-fund inflows is another sign of level-headedness. Net inflows in the six months through October equaled just 3.7% of average assets, safely below the frothy peak of over 5% in early 2000, according to Levkovich.

Last year, the public was pessimistic -- and wrong. This year it's optimistic. A lot of people are crossing their fingers that this time, the conventional wisdom turns out to be right.

By Peter Coy

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