Is Anger Blinding Americans to Stock Market Opportunities?

Many Americans may be so blinded by rage that they're missing the opportunity to invest in what's beginning to look like an economic recovery. The business cable networks appear to have a strong editorial bias against the Obama administration's policies. But it's hard to separate that bias from a deeper kind of pseudo-populist anger captured in public outbursts ranging from "you lie" to "baby killer," to rumors of FEMA concentration camps for so-called patriots.

Yet facts are stubborn things, and all that anger may be keeping politically disgruntled investors out of stocks at a time when rejoining the market could help them replenish retirement funds decimated by the S&P 500's 40% fall between its October 2007 peak and January 2009.

The S&P 500 has now risen 42.5% since Obama took office, propelled upward in part by a $787 billion stimulus program and a bailout of Wall Street, and stock prices remain attractive relative to earnings growth forecasts. But a March 2010 Bloomberg national poll found that Americans believe the economy has gotten worse, by "an almost 2-to-1 margin" since March 2009.

Ignoring the Evidence

Moreover, a recent CBS News Poll found that President Obama's overall job approval rating has fallen to a new low of 44%, down from 49% in late March. There's a clear disconnect between many investment professionals' assessments of opportunity and the mood of many Americans. Unfortunately, rage won't help those Americans pay for their retirements.

This anger is causing the public to ignore the broad evidence of an economic recovery under way. Stocks have spiked 74% from their recessionary low, and the dollar has risen 10% since Nov. 25, 2009, against a basket of six major currencies. Housing prices have stabilized, mortgage rates are still fairly low and GDP is forecast to grow 3% this year. Moreover, as I wrote last week, the March employment report showed that many industries are once again creating jobs.

And as I wrote Thursday, stocks remain inexpensive by one key measure: the Price/Earnings to Growth (PEG) ratio. Analysts predict S&P 500 earnings will rise 28.3% in 2010 and another 20.5% in 2011. They believe that 2011 will mark a record year for earnings -- topping 2006's record of $628.8 billion by $59 billion. Plugging these numbers into the PEG formula would suggest that the S&P 500 trades at a PEG of 0.83 on 2010 earnings growth and a PEG of 1.15 on 2011 growth.

Perception Versus Reality: Just a Natural Time Lag?

Several reasons could account for the mismatch between the public mood and the state of the economy and the markets. One might be that a group of politicians is hoping to channel the public's rage over the financial crisis against the administration that appears to be cleaning it up. In so doing, they may be hoping to regain the political power they lost after pushing the policies that caused that financial crisis.

Another reason could be more benign: Employment takes a long time to pick up after a recession ends, and until the job market comes back strong, the public stays in a bad mood. The New York Times analyzed recoveries after seven recessions from 1950 through 1982 and found that, on average, a strong improvement in the performance of the three-month household employment survey -- a rise 0.8% or more in the number of jobs -- lags the end of a recession by an average of seven months.

This time around, job creation is picking up significantly, but public sentiment hasn't kept pace, even though the latest statistics suggest the recession may have ended months ago. The Times noticed that the March employment report showed a gain of 1.1 million jobs during 2010's first quarter, "the best performance since the spring of 2005."

Seeing the Opportunity

America is still the land of the free, and citizens are free to not invest in stocks for any reason, including their dislike for who's running the country. But the evidence suggests that while many people are taking this position, a growing number have started to recognize the opportunities that exist in stocks. For example, the week before Obama's inauguration, the amount of cash in safe, low-yield money market funds peaked at $3.92 trillion but that figure now stands 24.4% lower, at $2.96 trillion.

For those who have chosen not to venture back into the stock market, let's hope they can retire on the barely-above-0% interest rates they're earning on those money market funds. Or they can set aside their political views, and buy stocks to improve their own futures.