Investor Optimism Wanes on Market Uncertainty But Not Enough To Cash Out, Says Vanguard

Investors are looking beyond what they think is a bumpy short-term, and expect high returns over a period of time.

According to the latest Vanguard Investor Expectations Survey, investors are pessimistic about the short-term economic outlook despite optimism about long-term returns. In October, investors expected stocks to return 4.4% over the next 12 months, 1.1% less than in August.

While expected returns dropped below the historical average of this survey by 0.1%, they remained significantly above the October 2022 low of 0.6%. Long-term returns over the next ten years remained relatively stable at 7%.

“Investor confidence followed the market downward in October,” said Xiao Xu, an analyst at Vanguard's Investment Strategy Group, in a prepared statement. “The tide of investor sentiment appears to be turning away from summertime highs."

Stable Expectations for Growth

Overall, investors are optimistic about the economy, with an expected 3.1% average gross domestic product growth over the next three years and 3.8% over the next decade.

Real GDP grew by a healthy 4.9% in the third quarter, which validated their economic optimism. The U.S. economy and investors have proven resilient despite high interest rates and inflation putting pressure on pocketbooks.

Uncertainty Is Increasing

In October, investors believed there was a 6% chance the stock market would fall by 30% or more in the next year, which was 0.9% higher than August's reading and higher than the historical average of 5.5% for the survey.

According to investors, the probability of an economic disaster increased by 0.5% to 5.9% due to geopolitical concerns, high interest rates, and inflation, reversing the downward trend of the last six months. Despite this, the Fear and Doubt Index remains well below its peak in 2022, showing investors are not panicking.