Investors are beginning to hoard cash on fears of inflation and a possible recession, a recent Bank of America (BAC) report stated. BofA joins Goldman Sachs (GS) in expressing concern for the outlook on markets in 2022, as institutional investors grow increasingly wary of economic headwinds.
However, Betterment Director of Behavioral Finance and Investing Dan Egan, believes that current investor behavior is not necessarily indicative of significant bearishness.
“So far, we’re not seeing any strong bearish sentiment,” Egan told Yahoo Finance Live. “Back in March, April of 2020 — this is a sort of canonical example of what tends to happen — out of 1,000 investors, six of them do something, whatever that thing is. Of those six, you’ll see about three of them go defensive. That means either withdrawing money or having a more defensive asset allocation.”
In this scenario, Egan said two of the six investors who alter their strategy actually become more aggressive, engaging in a “buy the dip” approach.
“And the last one is going to revisit their financial plan, maybe push their goals out of it,” he added. “So net, net, we’re seeing one out of 1,000 people do something defensive during a large market down. So generally speaking, there is not a lot of bearish sentiment.”
Egan joined Yahoo Finance Live to discuss the outlook for retail investors amid wild swings in the market. With the Federal Reserve’s Wednesday decision to raise interest rates by 25 basis points amid the war in Ukraine, markets face much uncertainty heading into Q2 of the 2020 calendar year. The Fed’s next policy-setting meeting is scheduled for May 3-4.
BofA’s recent Global Fund Manager Survey reported that 60% of respondents now anticipate global equity markets this year will enter a bearish state where security prices fall at least 20%. This is up from just 30% of respondents who held the same sentiment in last month’s report.
Retail investor behavior
As for what is being observed with regard to behavior of the average retail investor, Egan noted that investors’ level of experience is often indicative of how they have been reacting to the recent pullback.
“Normal people just have a continual buying-every-two-weeks-type mentality,” he said. “On the other hand, what we do see during these periods is new investors stepping back from pulling the trigger. Existing investors who are experienced — they have no problem when they see this. And they’ve been through the Trump election, Brexit, [many] downturns that have taught them this is generally short-term and will pass.”
Egan said that inexperienced investors lacking experience in downturns are often “spooked” and end up waiting too long to buy in. Some experts believe that investors should be patient rather than early, however — UBS (UBS) Head of Equity Derivatives Research Stuart Kaiser recently expressed his concern over issues currently looming over markets.
“[UBS are] definitely not buyers of the dip at this point,” Kaiser told Yahoo Finance Live. “I mean, just for some perspective, we were worried about the first half of this year before the Russia-Ukraine conflict even started just based on the Fed and the growth and inflation dynamics. So the geopolitical stuff only reinforces that.”