While there were some waves of optimism and pessimism, investor market expectations were remarkably tame overall, according to a new study by Vanguard.
Citing data obtained during a series of surveys issued to Vanguard retail clients and 401(k) participants, “Investor Expectations: A New Survey” reveals that investors assigned a 72% probability of conventional equity market returns (defined as a one-year return ranging from –10% to 30%) when presented with five possible scenarios for U.S. stock markets over the next 12 months.
The resulting white paper by Vanguard’s Stephen Utkus and Jean Young analyzes results compiled from February 2017 to June 2019 based on bimonthly surveys covering expected stock market returns, GDP growth rates and bond returns. The surveys involve a random sample of U.S.-based Vanguard investors, with about 80% from retail clients and 20% from participants in employer-sponsored DC plans. The study is based on a larger effort by Stefano Giglio of Yale University, Matteo Maggiori of Harvard University, Johannes Stroebel of New York University and Vanguard’s Utkus.
Overall, the study shows that respondents assigned slightly higher probabilities to adverse market events and underweighted very positive ones, expecting a somewhat higher chance of more benign markets. Probabilities for each of the five prescribed scenarios are listed below:
- 5% likelihood of a market disaster (a one-year return of –30% or more)
- 14% probability of a market slump (a one-year return between –10% and –30%)
- 72% chance of conventional markets (a one-year return between –10% and 30%)
- 7% possibility of a strong bull market (a one-year return between 30% and 40%)
- 3% chance of an exuberant bull market (greater than 40%)
“Vanguard recognizes that expectations play a key role in making financial decisions,” says Utkus, who is global head of investor research for Vanguard Investment Strategy Group. “Rather than focusing on past financial markets, our research seeks to understand what investors are anticipating in terms of future scenarios and events.”
In the most recent results, the average expected one-year stock market returns were roughly 5% and the expected 10-year returns were approximately 6%—both of which are lower than the annualized return of the past 30 years. The study notes that, while these expectations are rather muted, they remained consistent across surveys beginning in 2017 and are marginally more optimistic than the central tendency of Vanguard’s expected return outlook, which ranges from 3% to 5%.
The authors note that over time throughout all 15 surveys, the expected risks of the two down-market scenarios were similar. Only the December 2018 survey seemed to show a reaction to the market decline and volatility of the fourth quarter of 2018.
The authors note that because U.S. equities exhibited relatively low volatility during the study period, the findings “must be interpreted in light of these relatively benign market conditions.” They anticipate that expectations will demonstrate greater variation during large market shocks.
“With this data serving as a baseline for understanding individual investor market expectations, we are seeking to use ongoing surveys to evaluate the ways in which expectations evolve and are interrelated with other dynamics (e.g., savings rates), especially during periods of market volatility,” explains Young, who is senior research associate with Vanguard’s Investment Strategy Group.
In fact, the U.S. equity market, as represented by the S&P 500 Index’s closing value, rose steadily to 19% in 2017. During 2018, it reached a new peak, rising 8% year-to-date in September, but in the fourth quarter fell 20% from that peak, dropping 6% for the year. For the year-to-date through June 2019, the market rose 17%.
Bond Returns
Respondents expressed similar expectations for both short and long-term GDP growth, with an average three-year annualized GDP growth of 2.7% and a 10-year annualized GDP growth of 2.9%. The average expectation for a 10-year Treasury annual return was 2.3%.
More than 16,300 respondents completed approximately 32,200 surveys in 15 installments over the period February 2017 to June 2019.
