It was another strong quarter for the market, and investors are becoming increasingly bullish on the U.S. economy and stocks. This is according to Fidelity’s latest Greenline Forum (GLF) survey of 326 Fidelity clients, which was conducted online from July 12 to July 19.1
Citing improvements in housing, jobs, and consumer sentiment, the majority of Fidelity clients who responded to the survey said they plan to invest more in domestic stocks over the next 30 days.
What investors are saying
As of July, 56% of those surveyed said they were optimistic about the general market over the next six months, while less than 16% said they were pessimistic. This is almost a complete reversal of the prevailing sentiment at the same time two years ago when roughly 11% were optimistic and nearly 60% were pessimistic (see the chart below).
The number of Fidelity respondents with a favorable outlook has been on the rise for four quarters in a row. Conversely, those with a pessimistic outlook have been on the decline.
Several nationwide surveys have also shown consumer sentiment to be broadly improving, including the July Thomson Reuters/University of Michigan consumer sentiment report that hit its highest level since July 2007. In the Fidelity Viewpoints® August market update, Dirk Hofschire notes, “Consumer confidence is back up to levels that we haven’t seen since before the 2008 recession.”
What’s driving the optimism
As the chart above suggests, the shift in attitudes may be due in part to the rallying U.S. stock market. The S&P 500® Index is up 20% over the past 12 months and 22% on a total return basis, with most of those gains coming in 2013. “Stock markets in developed markets, like the United States, have been outperforming the stock markets of emerging markets for the past three years,” Hofschire says. “This is the first time we’ve seen this on a sustained basis since the late 1990s.”
Respondents said that companies reporting better earnings and revenues contributed to their more confident view of the market. As of August 8, Bloomberg data shows that 72% of the 445 companies that have reported earnings beat profit projections, and 56% topped revenue estimates.
What investors are doing
In April, 47% of respondents who thought they would take action said were leaning toward buying more U.S. stocks. By July, 56% said they actually did buy more. And of those who plan to make portfolio changes in the next 30 days, 63% said they plan on buying U.S. stocks.
Still, some caution persists in the wake of the strong stock market rally. Of those who made changes to their portfolio in the last 30 days, 13% took assets out of the market. Yet only 22% plan on shifting more money into cash in the next 30 days, down from 27% in April.
Despite the recent drop in bond prices, only 25% said they planned to invest less in domestic fixed income, 16% in international fixed income. Instead, 60% said they planned no change to their domestic fixed income portfolio and 76% planned no change to their international fixed income holdings.
Investor sentiment is a significant indicator to watch. The more confident investors are, the more likely they may be to invest in riskier asset classes and securities.
Nevertheless, investors should be mindful of the “herd mentality.” Simply because investors are more optimistic does not necessarily mean that the stock market will perform well. In fact, the market can move in any direction well in advance of investor sentiment. Investors should continue to focus on their own risk and reward objectives and constraints.