Not since 2008 have wealthy American investors been so pessimistic about the markets.
A survey conducted by CNBC revealed that 56% of Americans that hold $1 million or more in investable assets expect the S&P 500 — a proxy for the broader stock market — to drop 10% in 2023. Almost one-third of those surveyed anticipate a 15% minimum drop in the index.
George Walper, president of Spectrem Group, which conducted the survey in partnership with CNBC, said, “This is the most pessimistic we’ve seen this group since the financial crisis in 2008 and 2009.”
The gloomy outlook can be traced back to a confluence of factors. Historically high inflation continues to plague the economy, and the Fed persists in driving interest rates higher to battle rising prices. Economists fear the aggressive policy could cause a recession in 2023, as previously reported in The Dallas Express.
Higher rates place downward pressure on the stock market. As rates rise, companies have less incentive to borrow to grow their business, which can put pressure on expenses and slow hiring as companies adopt a more conservative approach to their operations.
In recent months the market has witnessed significant layoff announcements or hiring freezes at prominent American tech companies, some of the greatest beneficiaries of a surging stock market during much of the COVID-19 pandemic.
It has been a challenging year for Wall Street, especially with the recently volatile S&P 500 already down double digits, but wealthy investors still see room for a further drop.
Tim Hayes, the chief investment strategist at Ned Davis Research, said that tech stocks, in particular, were previously viewed as sure bets. People assumed “these stocks are just going to keep going up forever,” said Hayes.
Pandemic-fueled stimulus checks also helped drive the broader stock market higher in recent years. Americans leveraged the excess income to purchase equities, many for the first time. Last year, a survey from Charles Schwab revealed that roughly 15% of retail investors in 2021 began trading the year prior.
Millionaire investors make up most equity ownership. This group owns over 85% of individually-held stocks. When accounting for all investments — stocks, bonds, private equity, real estate, and others — roughly one-third of millionaires surveyed expect to see their total investment returns drop in 2023. Most, at the very least, expect modest returns of under 4%, less than the current short-term Treasury yield.
In preparation for the anticipated market storm, many millionaires are allocating higher percentages of their portfolios to cash. Of those surveyed, 17% hold “a lot more” cash than last year.
The outlook for the broader economy is not much different. Most, six out of 10, expect a “weaker” or “much weaker” economy by the end of next year.
However, younger investors are much more optimistic about the current environment. Most millennial millionaires (81%) expect their portfolios to be higher at the end of 2023. Almost half (46%) expect asset values to climb at least 10%.
Over six out of 10 baby boomer millionaires, on the other hand, believe their assets will be “much lower” in 2023.
Walper speculates that the vast difference in outlook stems from the unique experiences of each demographic. Millennials have grown up with historically-low interest rates coupled with ballooning equity valuations. Older investors, however, have experience with high inflation, elevated interest rates, and extended bear markets.
“The millennial millionaires have never lived through a true inflationary environment,” explained Walper.
