Are Investors Losing Faith In The Stock Market?

Trump’s trade and tariff talks appear to be affecting investor confidence in the stock market. According to a new survey done by Chicago-based company Spectrem, stock investing dwindled among millionaires and non-millionaires from 34.1 percent to 30.2 percent this month.

Are investors right to be fearful?

What We Know

Non-millionaires expressed growing concerns about investing, with nearly half (47.8 percent) indicating that they did not plan to increase their investment in the coming month, the highest level since July 2017.

The data, the company stated, pointed straight to geopolitics, especially increased angst among investors over global trade issues.

“Investors carefully watch government decisions, and recent actions have caused them to wonder where the U.S. is headed,” said George H. Walper Jr., president of Spectrem. “While the stock market regularly seems to recover by the end of the day’s trading, midday numbers have frequently been down by hundreds of points. Each day presents new uncertainties about the direction of American trade with foreign nations. Until markets have greater clarity on the issue of trade barriers, investors will respond to that uncertainty by pulling back."

In its latest monthly Investor Confidence index, Spectrem says there’s evidence to support an impending bear market in late 2018.

With talk of a bear market on the horizon, investors have changed their approach. “Investors also expressed greater interest in safer investments such as stock mutual funds and bond mutual funds, while millionaires significantly increased their cash position from 20 percent to 24.5 percent, an increase of more than four percent from May,” Spectrem said in the report.

Calming Down Clients

Investment advisors do see some growing concern among clients, but that’s par for the course in volatile markets.

“I do hear more worry in clients’ voices,” said Lou Cannataro, a partner at Cannataro Park Avenue Financial in New York City. “My biggest job now is to show them that we have already planned for volatility, keep them on track and keep them focused on the long-term. The short-term market gyrations and all the conversations surrounding them are simply noise.”

Besides, Cannataro said, large market declines and periods of volatility have historically proven to be among the best times to invest.

“The market can offer more opportunity after diversity,” he said. “ Since 1949, there have been nine major periods of 20 percent or greater declines in the S&P 500. The average of 33 percent decline of these cycles can be painful in the short term for sure.”

“However, trying to time the market and missing out on any part of the average bull market's 268 percent return could be even worse. Additionally, the fact that the downturns have had a relatively short duration - 14 month on average - makes it hard to time the market successfully.”

Not everyone agrees with that Spectrem’s downbeat investor assessment, especially given the stock market’s strong track record in the last few years and the robust health of the U.S. economy.

Timothy Wiedman, a business professor at Doane College in Lincoln, Neb., actually pegs a number on what that gain might be.

“While the U.S. stock market will almost surely see increased volatility (i.e., daily ups and downs) over the next year-and-a-half," Wiedman said, "I believe that the overall trend will be upward -- with both the S&P 500 and the Dow Jones Industrial Average likely increasing at least 10 percent over that period."

The market should see a balance going forward of profit-minded sellers and opportunistic buyers, Wiedman said.

“The increased volatility will occur because many investors expect to see the current bull market come to an end in the fairly near future, and a sizeable number of those folks will seek to lock in profits from their 'high flyers' by selling portions of those positions,” he said. “However, that sales activity may also create some buying opportunities for other investors who are more optimistic, and thus increase demand for many of those stocks.

Talk of a large-scale 'trade war' is overblown, as well, Wiedman said.

“The U.S. will surely continue to impose tariffs on a selective basis, but nothing akin to a modern version of the Smoot-Hawley Tariff Act will occur,” he said. “President Trump is a negotiator who often begins by stating goals that are wildly optimistic -- while knowing that his positions will ultimately be moderate.”

Bear Tracks

Other investment professionals say that most investors recognize the market has
had a significant run-up over the past 18 months, and realize that a pause, if not a full-blown bear market, is in order.

Bill Schultheis and James Nevers, money managers at Soundmark Wealth Management, Kirkland, Wash., said in a recent research note, “There is nothing on the horizon that leads us to believe a bear market is imminent.”

Soundmark’s forecast calls for muted economic global growth on the horizon.

Expected returns in common stocks is set to return significantly less than its long-term average of 10 percent, somewhere in the 5 percent-to-7 percent range, the note said. “We have incorporated these conservative estimates into our clients' projections.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at brian.oconnell@innfeedback.com.

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