Professional fund managers recently surveyed by Bank of America Merrill Lynch (BofAML) appear to be a bit more optimistic about stocks and the broad economy. For example, average portfolio cash holdings have declined from the 15-year high of 5.6 percent seen in February to 5.1 percent this month. At the same time, allocations have risen not just in equities but also in real estate and commodities. A net 11 percent of surveyed managers expect the global economy to strengthen over the next year, the highest reading in three months, and respondents also anticipate just two interest rate hikes from the Fed in 2016, in line with what officials signaled at last week’s Federal Open Market Committee (FOMC) meeting. For many retail investors, though, the outlook is somewhat less bright. At least that is what the most recent survey of consumer confidence by The Conference Board suggests, with just 26.5 percent of Americans saying that they believe stock prices will rise over the next twelve months (38.0 percent expect equites to fall). As for the economy, nearly a quarter (24.2 percent) of surveyed consumers feel that jobs are currently “hard to get” but 17.2 percent of respondents still expect that their income will increase in the year ahead.
A similar study from Wells Fargo and Gallup found that 32 percent of surveyed Americans are optimistic about stock market performance over the next twelve months, down from 45 percent in the fourth quarter of last year. The percentage of investors feeling confident in the stock market as a place to save and invest for retirement also slid in Q1, falling from 43 percent to 36 percent, and non-retirees were found to be slightly more optimistic than retirees. This quarter's decline in investor confidence was likely exacerbated by January’s significant market drawdown that was also the worst start to a new year since 2009. Further, stocks have rebounded recently but intraday market swings remain elevated and 40 percent of surveyed investors said that they now consider heightened volatility to be the “new normal.” Sentiment can be as volatile as stocks, though, and it is important for investors to avoid overreacting to short-term fluctuations in the market given the historic long-term resiliency of equities. For example, even with average intra-year declines of 14.2 percent, the benchmark S&P 500's annual return was positive 27 of the past 36 years. Moreover, persistent participation in the stock market combined with a dollar-cost averaging approach to retirement investing can actually turn large drawdowns into opportunities. We are of course here to help with any questions you may have.
Sources: BofAML, Pensions & Investments, ValueWalk, The Conference Board, WSJ, Wells Fargo, Gallup, J.P. MorganPost author: Charles Couch