Expectations and the Economy

December 27, 2010

It’s amazing how the public’s expectation about the stock market and the economy seem to be influenced by whichever direction the markets happen to be performing at the time.

A recent study by Putnam Investments found that 61% of Americans believe that stock prices will rise in 2011, and that forty-three percent are betting on a better housing market.  A third believe the economy “will be much healthier” in 2011, and 47% expect that “consumers will start to spend again.”

I can’t prove this statistically, but I’m willing to bet that in 2001, 2002, and 2008 (the last three calendar years the market was down) a majority of the same 1,000 survey participants would have predicted that the markets would continue to fall the next year and that the housing market would worsen.  This is the nature of financial  prognostication.  When the economy is good and the markets are on the rise, we expect the trend to continue.  Conversely, when the economy is in recession and the markets are down you hear comments like, ” I don’t see this improving for some time,” or, “I sold my equity funds and plan to stay in cash until the markets improve.”  (Of course by the time they get back into the market most of the gains have already transpired but that’s another story.)

Not surprisingly, the head of global marketing at Putnam says that these results show that “despite the fact that this has been difficult year, Americans retain their essential optimism.”  This may be true, and it would be a convenient explanation regarding the survey, but I suspect the results are more about psychology than optimism.

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One Response to “Expectations and the Economy”

  1. Zambonesman Says:

    so is the point that we should put money into the market right after things tank?


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