Despite Stock Gains, Americans Remain Pessimistic

A few weeks ago, I wrote about the Obama administration not getting enough credit for the stock market's performance. An article today from Bloomberg suggests a reason why: most Americans don't realize that their portfolios are much better off than they were a year ago. This is not only a political problem but also one for economics: until consumer sentiment increases, spending will remain low, and the recovery will be a slow one.

Here's what Bloomberg says:

By an almost 2-to-1 margin Americans believe the economy has worsened rather than improved during the past year, according to a Bloomberg National Poll conducted March 19-22. Among those who own stocks, bonds or mutual funds, only three of 10 people say the value of their portfolio has risen since a year ago.

During that period, a bull market has driven up the benchmark Standard & Poor's 500 Index more than 73 percent since its low on March 9, 2009.

In other words, even though only three in 10 say their portfolio has improved, they're wrong. Most stock portfolios have a strong correlation to the S&P 500 and that's up a whopping 73%.

Americans have become so pessimistic about the economy that the vast majority of those who own stocks don't realize their wealth has actually increased significantly over the past year. This means the wealth effect won't work. That's an economic concept that says, when people perceive they are richer, they spend more. It's not working out here because perception does not reflect reality.

I suspect most of the reason why stems from the extremely high underemployment. In the latest Gallup poll, this number was up to 20%. When one out of five Americans struggles to make ends meet, almost everyone will witness economic-induced suffering among even their close friends and family. People see the grave problem our economy faces with underemployment, and it overshadows the substantial gains in wealth felt by many Americans.

So we're caught in a catch-22. Americans will remain pessimistic and spend less until employment improves, but employment will struggle so long as spending remains low. In a normal recession, the wealth effect might help. But this time around, it doesn't appear to be doing much.