Stocks Are Soaring...So Why Are Some Investors Glum?

Good news has never felt so bad.

With the Dow Jones Industrial Average flirting with record highs -- and the broader Russell 1,000, 2,000 and 3,000 also at historic peaks -- investors should be positively giddy. Instead, they appear to be glum, their mood dictated by concerns over rising gas prices, falling home values, fluctuations in currency values and worries about inflation.

Several different studies have shown that about 60 percent of individual investors believe a recession is coming. That's about double the percentage of institutional investors expecting a big economic slowdown.

Clearly there is a disconnect here because strong market activity typically isn't met with widespread pessimism.

"The market's move is dollar-weighted, it's being fueled by the big institutions but retail investors have, for the most part, not participated," says Jack Ablin, chief investment officer for Harris Private Bank in Chicago. "Fewer and fewer people are participating in the market's prosperity."

Some of that situation is hangover from the last bear market. Investors who became euphoric in the late 1990s got hammered when the market turned in 2000 and they're not anxious to repeat the experience. They discount the market's performance because of all the negative factors they see out there and don't want to get caught up in any euphoria because that was a big reason they got tripped up the last time.

Another issue is inflation, particularly as it impacts regular costs and savings. This is where, for many people, rising gas prices figure in.

A recent study conducted for the Civil Society Institute's project showed that about half of all households, regardless of income level, will "definitely or probably" have to cut back on personal spending if gasoline hits $3.50 per gallon.

Ideally, those consumers might cut back on driving to reduce their gasoline costs, but that's not a realistic option for many consumers. It's not that driving is a "way of life," it's that many people can't reduce their driving without radically changing their quality of life, especially where it concerns getting to work.

Raiding the piggy bank

One place where those consumers who are feeling the pinch are likely to turn to for help is from their own savings pool, cutting back on the amount they can set aside. That's an easy sacrifice to make for people who don't have a lot of faith in the market or who believe that they might have missed out on a rally but who foresees a downturn in the not-too-distant future.

While most market observers like the looks of the economy right now and seem to believe that the rally can continue for awhile, there clearly are some concerns on the horizon.

Politicians will do what they can to help make the next 18 months smooth from an economic standpoint, hoping to not rock the boat too much before the presidential election. The Federal Reserve appears likely to hold interest rates steady for the rest of this year, and many observers believe that there's a rally in large caps yet to come.

If the market can continue to gain ground -- or just hold its ground -- through the election, there's little question that things could get rocky in 2009, spurred by changes in political policy that play out in the economy and stock market.

Says Ablin: "This is really the time to stay invested, to look at how you are allocated domestically versus internationally and to remember that there is no perfect time to be in the market, but a lot of really good times. And in some of those good times, the economy looks bad or consumers are losing confidence."

So if the good news about the stock market feels bad, perhaps an investor ought to consider investing where it feels good. That's not a lesson in tossing diversification out the window, but rather a find-your-comfort-zone-in-current-conditions admonition to plow forward; if the hot spots in the domestic economy are troubling, consider going international.

But keep going. The smart money has stayed put and is less worried about the economy than the average investor.

Gas gouges spending

The study, produced by a group trying to get more widespread use of fuel-efficient cars, raises some interesting questions for consumers, namely where they will cut their spending.

If reducing driving costs is out of the question and cutting savings is a last resort then consumers need to think of what's in the middle.

Rather than think of the situation as "What can I cut?" try to examine it as "How much can I make back?"

Using coupons, buying in bulk, eating out less often, brown-bagging lunch or going from a large coffee to a small en route to work is not going to cure your financial ills, but it will make up for some of the damage done by higher transportation costs. The idea is to let the gas situation turn on your creativity rather than your fear.

Track your spending for a month, watching where the money goes. See if you can reduce both fixed and variable costs, where changing phone plans could reduce a fixed expense and drinking more water -- and less soda -- might eliminate a variable expense.

Waiting until gas hits $4 a gallon, which it may during the summer, and makes you feel desperate is no solution; act now and you might be able to get more comfortable with inflation before it ever takes root in your home.

Copyright (c) 2007 MarketWatch, Inc.