There are a lot of potential headwinds for the stock market in the near-term, e.g. the upcoming Presidential election, heightened geopolitical tensions, and the Federal Reserve’s pace of interest rate normalization. However, overall investor sentiment has actually been improving recently, according to a new report from Wells Fargo and Gallup. Specifically, the research duo’s Investor and Retirement Optimism Index jumped to 79 at the end of the third quarter of 2016, the highest reading since just prior to the start of the “Great Recession.” Older Americans helped drive the Q3 gain, as surveyed retirees reported much larger improvements than nonretirees regarding their level of confidence in both personal finances and the national economy.
Confidence in the stock market, though, was the main factor behind last quarter’s big improvement in the headline index because 51 percent of surveyed U.S. investors described themselves as being “very” or “somewhat” optimistic about the next twelve months for equities performance, up markedly from 42 percent in Q2. For 2016, respondents on average expect to realize an annual rate of return on their investments of 7 percent but nearly a fifth of investors (18 percent) think that they will earn over 10 percent this year. As of this posting, the benchmark S&P 500 index is up 4.04 percent 2016-to-date, meaning that those optimistic outlooks are not completely out of reach for investors who have maintained a properly diversified portfolio and regularly consulted with a professional financial advisor.
As for diversification across asset classes, investor respondents on average reported having 35 percent of their savings in stocks or stock mutual funds, 19 percent in cash, 11 percent in CDs or money market accounts, and just 10 percent in bonds or bond funds. The apparent aversion to bond investments is not too surprising considering that Treasury yields are still near historic lows, and that fixed income products could underperform in the rising rates environment we may soon be entering. However, a lack of understanding could also be keeping participation in the bond market low because many surveyed investors seem to not fully grasp the basic mechanics of these instruments. For example, over half (54 percent) of respondents said that they simply do not know what happens to bond prices when interest rates fluctuate, and only 22 percent correctly identified the inverse relationship.
When asked about whether they prefer low interest rates or high interest rates, 63 percent of all surveyed investors said that low interest rates would be better for their current financial situation. That rises to 71 percent for nonretirees but falls to just 41 percent for retirees, as expected given that older individuals should typically have a greater exposure to fixed income products so as to reduce their portfolio’s sensitivity to the (typically riskier) stock market. Moreover, 38 percent of surveyed retirees said that they are trying to “keep their nest egg intact while living off the interest as well as Social Security.” Forty-two percent of retirees reported that they are “carefully spending down their retirement savings so it lasts as long as they need it,” and three-quarters (76 percent) said that they are confident they can maintain their chosen drawdown approach throughout retirement.
Sources: Wells Fargo, Gallup
Post author: Charles CouchDisclosures