How Public Perception Can Crush the Stock Market

All things considered, it's been an incredible run for the U.S. stock market since finding its bottom in March 2009. The Federal Reserve has responded swiftly and decisively in keeping lending rates low to spur refinancing and new loan generation activity for individuals and enterprises, while also working to put a foundation under the housing sector once again.

Every hiccup in the uptrend has been met with skepticism by bears, and in every instance thus far since 2009 they've been proved wrong. Most of those skeptics have pointed to some economic or valuation factor, such as how the S&P 500's (SNPINDEX: ^GSPC  ) price-to-earnings ratio has risen from a low of 15 early last year to roughly 19 as of now.

Another common theme is the natural ebb and flow of the tech cycle. For instance, the tech-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC  ) cranked out 20 consecutive 12-and-a-half-year highs earlier this year, and the natural cyclicality of the tech replacement cycle would suggest that a sustained uptrend just isn't possible -- yet the Nasdaq keeps marching higher.

Even the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , which you'd expect would be susceptible to weakness from Europe's ongoing austerity measures and China's slowing GDP growth because it's made up of 30 globally diverse companies, has marched past 15,000.

If perception is reality, then we're in big trouble
But can the stock market overcome the most dangerous of all forms of skepticism -- public perception? It's one thing for a small group of investors to insinuate that an index has come too far, too fast. It's a completely different ballgame when the public -- composed of investors and those who don't invest -- are losing faith in some of the tools integral for maintaining a strong market and economy.

Source: Francesco, Flickr.

A Gallup poll released last week asked a random sampling of 1,529 adults in early June what their level of confidence was with regard to 16 institutions in the United States. The respondents were to answer whether they had a great deal, quite a lot, some, or very little, confidence in these 16 institutions. Needless to say, the respondents who exclaimed "a great deal" or "quite a lot" were notably missing for some key institutions: 

Institution

2012

2013

Change %

The military

75%

76%

1%

Small business

63%

65%

2%

The police

56%

57%

1%

The church or organized religion

44%

48%

4%

The presidency

37%

36%

(1%)

The medical system

41%

35%

(6%)

The U.S. Supreme Court

37%

34%

(3%)

The public schools

29%

32%

3%

The criminal justice system

29%

28%

(1%)

Banks

21%

26%

5%

Television news

21%

23%

2%

Newspapers

25%

23%

(2%)

Big business

21%

22%

1%

Organized labor

21%

20%

(1%)

Health maintenance organizations

19%

19%

0%

Congress

13%

10%

(3%)

Source: Gallup, % of respondents who said "a great deal/quite a lot."

It wasn't all bad ...
Understandably, there were quite a few bright spots here. Small-business perception improved by two percentage points to 65%, and we all know that small business growth is vital to keeping the U.S. economic engine moving forward.

It's also nice to see a five-percentage-point increase in banks. Obviously, sentiment for banks is always going to be toward the lower end of the scale, because no one likes paying bank fees, but the fact that many are "coming clean," per se, with settlements is certainly helping their image. Bank of America (NYSE: BAC  ) , for example, has settled with MBIA and multiple other federal institutions over its foreclosure and lending practices during and following the financial crisis. Anything that makes banks appear more transparent to the public is going to improve how the public perceives them.

The trio of trouble
Unfortunately, the vast majority of institutions received rather unconvincing approval ratings from the public.

Big business is one that the public rarely perceives in a good light. However, big businesses (in this case, corporations in excess of 500 employees) were responsible for 57% of all employee compensation in 2011, according to a New York Times report. For instance, you'll have no problem finding people who dislike Wal-Mart (NYSE: WMT  ) for its anti-union leanings and the fact that it uses its big wallet and clout to undercut local stores on price. Yet there's also little denying that Wal-Mart is a key indicator of the health of the U.S. economy, since it employs a staggering 1.3 million people in its stores and warehouses. If public perception of the key employers in the U.S. continues to fall, this could be a big problem.

Perhaps a far bigger concern was the drop-off in the confidence ratings for the medical system and Congress.

The decline in confidence in our medical system appears to be in direct relation to the growing uncertainty surrounding the upcoming implementation of the Patient Protection and Affordable Care Act, also known as Obamacare, in January. While this bill will expand the quality of care received and expand insurance coverage to lower-income individuals, it also could add a hefty burden onto the middle class, which could face rapidly rising monthly premiums.

The public's opinion on Congress, though, takes the cake! At no time in Gallup's history of polling the public on their opinion of Congress since 1973 has it been this low. Over the past four decades, high levels of confidence in Congress have fallen from 42% to just 10%. It may actually be more amazing that there are still some 20 million-plus adults in this country who do have faith in Congress to find compromises on issues such as the U.S debt ceiling and balancing the budget. As for me and the remaining 90% of the adult population, Congress has shown a penchant for destroying investor wealth by kicking the can further down the road rather than coming together and compromising with one another to solve our nation's problems.

The takeaway
The takeaway from this Gallup poll is very simple: If we as a nation have no faith in Congress to work together to help grow the U.S. economy and reform our U.S. health-care system for the better, and we're distrusting of the businesses that are responsible for employing the vast majority of Americans, then how can we expect the Dow, S&P 500, and Nasdaq Composite to head higher?

Public perception such as Gallup's just might be the closest thing we have to an emotions-excluded viewpoint of where the American people stand with regard to confidence in the U.S. economy. We can look at economic data until sunrise, examine chart patterns, and debate whether Wal-Mart has the right tools to squeeze an extra 10 basis points out of its margins. Ultimately, it comes down to whether the American consumer has any faith left in the system to push the market higher. Based on the figures I'm seeing here, we could be on the verge of a crisis of confidence in the markets.

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Read/Post Comments (7) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2013, at 2:10 PM, luckyagain wrote:

    "A Gallup poll released last week asked a random sampling of 1,529 adults in early June what their level of confidence was with regard to 16 institutions in the United States"

    The poll is flawed. A random sampling of adults is the wrong group. The only ones that counts in the stock market is people who invest in the stock market. Investors "vote" with their money. So an extra question, should have been asked "Are you an investor". Anyone answering yes is the important person.

  • Report this Comment On June 16, 2013, at 3:06 PM, TMFUltraLong wrote:

    I'd disagree because investors and non-investors drive consumption. If everyone's losing faith in congress and big business that's a big problem.

    Sean

  • Report this Comment On June 16, 2013, at 4:40 PM, Kirkhulk wrote:

    Public perception???

    What the hell is that???

    We the sheeple, shall be fooled part of the time, but not all the time...

    All coorportations are doing their best to screw us out of money and give us more for less. More water content, less product for the same prices...

  • Report this Comment On June 16, 2013, at 6:48 PM, caarecengi wrote:

    People hate Congress more than Banks...there's a shocker. Too bad tort lawyers aren't on the list...

  • Report this Comment On June 16, 2013, at 10:01 PM, WadoLocoonAmazon wrote:

    Im a fool who repents

  • Report this Comment On June 16, 2013, at 10:27 PM, 1951ruebaile wrote:

    I think that we are definitely headed for a replay of 1929. Wall Street and the big banks are unregulated and are doing very speculative, unsafe things. The President and Congress are either cooperating or unable to stop this process. Derivatives based upon selling the debt of individuals or the debt of nations are not a product to be marketing. What Wall Street is doing now is just a new version of a Ponzi scheme. It is going to bring our nation and the world to its knees.

  • Report this Comment On June 16, 2013, at 11:08 PM, JeCr wrote:

    It matters not what the stock market does. The Conservative Americans have stockpiled Foods and Ammunition an dare able to provide for themselves and their families. The LIberal nuts may all starve together and burn in hell.

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