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Image of a man and woman looking at an ipad screen. Both have worried expressions on their faces.

The ‘wall of worry’ has a bright side

A chief investment officer explains how fear can be a healthy check against investment hubris.

June 28, 2018
Erik Davidson

Erik Davidson is chief investment officer for Wells Fargo Private Bank.

“How is it going?” and “How are you feeling?” are questions we ask others (and are asked ourselves) all the time.

When it comes to investing these days, the answers are “pretty good” and “pretty well,” according to the Wells Fargo/Gallup Investor and Retirement Optimism Index Survey — a similar check-in we’ve been having with investors every quarter since 1996.

Conducted the week of May 7, the latest results marked the sixth straight quarter in which investors reported an optimism score of 100 or higher, levels not seen in the previous 16 years of the study. The index peaked at +152 in January 2000 at the height of the dot-com boom, and hit its lowest level, -81, in 2009 during the Great Recession.

Investors clearly are enjoying the current market conditions and strength of the economy, and appreciate the impact on their investment portfolios. But they’re sleeping with one eye open — fallout from the stock market crash of 2008 and the age-old market maxim that ‘the markets climb a wall of worry.’

As an investor, what worries you the most?

Consider these numbers from the same Gallup survey.

Eight in 10 investors (79 percent) are “somewhat” or “very worried” about possible data breaches from cyberattacks on business or government affecting the market. A similar percentage worry about the political climate in Washington (78 percent) and the federal budget deficit (77 percent).

Further, close to half (48 percent) are very worried about the possible impact of the political climate — the highest level of extreme worry for any of the items tested. Seven in 10 are “somewhat” or “very worried” that trade relations with China (71 percent) could impact the markets, while close to six in 10 worry about U.S. relations with Russia (59 percent), relations between the U.S. and North Korea (56 percent), and the economy (55 percent).

Note that the poll was conducted before the U.S.-North Korea nuclear talks in June.

What do you think will happen to the stock market’s value in 2019?

Two-thirds of respondents (65 percent) said the worst is ahead of us in terms of volatility — although they’re not highly concerned about it, are staying the course with their investments, and, by a large percentage (78 percent), are confident that investing in the stock market is a good way to save for retirement.

Three in four investors (74 percent) said the market volatility we’ve seen this year is normal and was to be expected; just 26 percent consider it a sign the market is in trouble.

No irrational exuberance here.

As a chief investment officer, that’s good news since investor sentiment often is a contrarian indicator of future market direction. In other words, when investor sentiment has been low, that has often proven to be a good time to invest. Conversely, when investor sentiment has been high, that has been a precursor of market weakness.

What type of investor are you?

Given that fact, it would be understandable if investors saw the recent strength of the Investor and Retirement Optimism Index Survey as reason for caution.

However, investors can take some comfort that while high, the index does not seem to be exhibiting signs of the euphoria that preceded the bursting of the tech bubble in early 2000. The fact that the survey also shows that investors are still quite anxious and climbing a wall of worry about the future direction of market conditions should provide some measure of comfort.

During the Great Recession, the stock market peaked in Oct 2007 and bottomed in March 2009. Past Gallup data shows investor sentiment did not peak at that time like it did in early 2000. At the time, the euphoria centered around housing, not stocks.

Which emotion most affects your investment choices?

Investor optimism today is higher than it was before the financial crisis, but lower than during the tech bubble, giving reason to be wary, but not to panic.

The Gallup study underscored again the clear role emotions play in investing.

Asked whether they were more of a rational or emotional investor, 96 percent said “rational” and just 4 percent answered “emotional.” Yet asked what was the greatest influence on their investment decisions, 59 percent cited an emotion: the fear of losing money.

The remaining 41 percent were motivated most by earnings potential.

There is a lot going on in the world these days, but the Investor and Retirement Optimism Index Survey results tell us that investors are happy for today but worried about the future.

Being worried might just be a good thing.

Wells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

Investment products and services are offered through Wells Fargo Advisors,LLC, Member SIPC, a non-bank affiliate of Wells Fargo and Company.

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