Lowest expectations yet for one-year stock market performance
The average Vanguard investor anticipates a one-year stock market return of less than 1%, the lowest expectation we have seen since we started measuring investor sentiment in early 2017. Just one year ago, that expectation was close to 6.5%. The one-year return of the Standard & Poor’s 500 Index, a proxy for U.S. stock market performance, was –10.62% during that period (the 12 months ending June 30, 2022).
Even so, a long-term perspective matters. “Only a small fraction of Vanguard’s nine million investors initiated trades in response to recent market volatility,” said Xiao Xu, a Vanguard investment strategy analyst. “That’s a result that’s consistent with our long-standing findings.” So far this year, just 14.3% of households with self-directed accounts have traded; among those, more than half launched just one trade. Even more telling: Most trading households moved money into equities rather than fixed income. When taken together, these results point toward an expectation for a steadier state over the longer term among Vanguard investors.
Figure 2: Traders ride the volatility wave and maintain course
Expectations for a market crash rose
Respondents forecasted a 7.5% likelihood of a market crash or disaster (defined as a one-year return of –30% or worse). That’s compared with an almost 8% forecasted likelihood of market disaster during April 2020, just as Americans were tiring of COVID-related lockdowns.
“It’s interesting to recall that in mid-March 2020, the S&P 500 Index fell 30% from its record high. That was just before a wave of state-by-state COVID-related stay-at-home orders were mandated,” said Jean Young, a Vanguard senior investment strategist. “That April, just as we were collecting these investor sentiment survey responses, the market started to rebound. It spiked, and then it continued to climb for more than two years.”
In short: History shows that it’s nearly impossible to predict the timing of a market rebound. Stay-the-course investors are often able to participate in a post-crash rally just by staying invested.
Expectations for three-year GDP growth dropped
Expectations for longer-term GDP growth dropped somewhat from earlier in the year—to a 2.5% average annual gain over the next three years—but not to the 2.2% level seen in April 2020.
“Still, it is worth noting that these most recent survey responses were collected in June, which coincided with the market’s recent slide into bear territory,” Xu said. “It could be interesting to see how these three-year economic growth expectations change when investors are surveyed again in August.”
Investor expectations could worsen when results are collected next, but it’s worth noting that the three-year GDP expectation did bounce back by the end of 2020, even after a months-long post-lockdown dip.
Figure 3: Investor expectations take a hit on economic growth
No action is often the best course of action
Despite a recent rocky road, it’s wise to remember that investors have historically benefited from a stay-the-course investment strategy. A July 2020 Vanguard research paper, Cash Panickers: Coronavirus Market Volatility, found that the vast majority of investors would have experienced more attractive returns by staying invested through COVID-related market turmoil.
“Trading in response to market volatility requires an investor to get two timing decisions correct: when to exit the market and when to reenter,” said Young, who coauthored the paper. “Staying put financially often leads to participation in a post-crash rally, which, in the case of the COVID timeline, left those investors in a more attractive position than their trading counterparts.”
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