Of Two Disconnects: The Economy and Portfolio Performance

I usually try to refrain from commentary strictly on economics and this post-- while close-- is no exception. There's a huge disconnect between Main Street and Wall Street that exists today and it isn't getting any better. For us to overcome this financial crisis these two sides must meet. We can't long exist in a dichotomous society. From Bloomberg:

Americans are down on the economy and the markets even as stocks and growth indicators are up.

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. The economy grew at a 5.9 percent annual pace during last year’s fourth quarter.

“It’s very difficult to turn perceptions around once you’ve been through the proverbial economic wringer,” says Mark Zandi, chief economist for Moody’s Economy.com. “Everything is colored by the fact that unemployment is near 10 percent. It doesn’t really matter what you ask, you’re going to get the same answer.”

Zandi says the poor performance people report on their investments “is very telling. It’s just a fact that everyone’s stock portfolio is up, or nearly everyone’s.”

Even among investors with annual incomes exceeding $100,000, and who might be expected to follow their financial holdings’ performance, more say they have lost money compared with a year ago than say they have made money.

J. Ann Selzer, president of Selzer & Co., a Des Moines, Iowa-based company that conducted the survey, says the disconnect is typical of the way Americans think about the economy.

‘Everyday Life’ Indicators

“Economists look at their indicators and the American people see indicators in their everyday life,” she says. “It is hard to argue with what people observe in their own communities.”

The poll also finds that Americans remain skeptical about the health-care overhaul even after the U.S. House passed the legislation March 21, with fewer than 40 percent of respondents saying they favor the plan. While most say the government should play a role in ensuring everyone has access to affordable care, a majority say health care is a private matter and consider the new rules approved by Congress to be a government takeover.

Wrong Track

A sense of despair pervades perceptions of the economy and nation. Barely one-in-three Americans say the country is on the right track. Fewer than one in 10 say they believe the economy will be strong again within a year. Just 4 percent of Americans who cut back on spending during the recession now say they are confident enough to open their wallets, according to the poll, which has a margin of error of plus or minus 3.1 percentage points.

Poll respondent Lynn Heath, 31, a Belleville, Illinois, stay-at-home mom with four children whose husband lost his job 18 months ago and since has only been able to find part-time work, says her family has nearly depleted its savings.

“We don’t have cable. We don’t have internet. I just learned how to make laundry soap. For $4, I can make two-and- half gallons,” Heath says.

The Obama Administration has made no progress over the past three months convincing the public that the $787 billion stimulus package passed last year either helped the economy or prevented greater deterioration. Only 37 percent of the public say they see positive effects, the same portion who said so in a December poll.

Economic Deterioration

Asked about a range of economic measures, people say they have seen deterioration over the past year: 54 percent say the condition of businesses in their community has worsened and 56 percent say the value of homes in their community dropped during the period.

Poll respondent Jim Buyer, 47, an electric utility lineman from Syracuse, Indiana, says that his impression of a worsening economy comes from cutbacks in overtime on his job and his observations as he drives to and from work along an industrial road that services home suppliers, toolmakers and recreational- vehicle manufacturers. Media reporting on the economy may be “slanted,” he says, and what he sees has greater credibility.

“We see the traffic in front of where we work,” Buyer says. “A couple of years ago it was hard to pull out at quitting time. Now you almost don’t even have to look because the traffic is so slim.”

Most Important Issue

Half of Americans say they believe the economy or unemployment is the most important issue facing the country. Health care was cited by 22 percent, followed by 20 percent who cite the federal deficit and government spending. Just 5 percent say the war in Afghanistan.

Unemployment in February was 9.7 percent. Payrolls in the U.S. have dropped every month except one since December 2007. Economists expect job growth to turn around in March, with a median forecast that payrolls will rise by 192,000.

Poll respondents rate persistently high unemployment the greatest threat to the economy over the next two years, with 75 percent calling it a high threat. Chronically high budget deficits are cited as a high threat by 70 percent, followed by homeowners who can’t pay their mortgages, which is cited by 58 percent. Higher taxes are deemed a high threat by 57 percent.

Nine of 10 Americans believe that cutting the deficit, which is projected to reach a record $1.5 trillion this year, will require sacrifices from middle-class Americans. Still, when asked about a range of potential tax increases and spending cuts to address the problem, the large majorities of Americans favor tax increases that only affect the wealthy.

More than three of four Americans say deficit-cutters should consider removing the cap on earnings covered by the Social Security tax, currently set at just under $107,000. More than two-thirds say repealing the tax cuts for wealthy Americans enacted by President George W. Bush should be considered.

Smaller majorities favor considering three other options: a reduction in annual cost of living increases for Social Security recipients, which 52 percent say should be considered; cuts in spending on public works, which 54 percent say should be considered; and a penny-an-ounce tax on sugar-sweetened drinks amounting to 12 cents on a 12-ounce can of soda, which 57 percent say should be considered.

Majorities say other options shouldn’t even be on the table. Among them are higher out-of-pocket payments for Medicare services beyond basic care, an increase in the eligibility age for Medicare, a 2 percent increase in income-tax rates on middle-class Americans, and elimination of the home-mortgage interest deduction.