Stocks Don't Always Go Up: New Data Reveals Investor Sentiment Is Hovering At Financial Crisis Levels

The probability that investors see of stock price gains in the year ahead have plummeted to levels not seen since prior to the 2008 Great Recession.

Furthermore, investors with over $100,000 are just as optimistic about stock price gains as stock owners overall, as macroeconimc headwinds remain unclear, according to the University of Michigan survey of consumers. 

What Happened: The ownership of stocks, including directly held assets as well as assets held in mutual funds and retirement accounts, rose to an average of 69% of all households in 2022, up from 66% in 2018, according to the report.

A primary contributor to the high market participation is that inflation adjusted returns on interest-bearing financial accounts continue to be negative, which is why investors would rather jump into sluggish equities.

Strikingly, the highest increase in market participation came from the lowest tier of households by income, as low-cost and fractional trading became relevant over the past few years with online brokerages such as Robinhood Markets HOOD.

Households with larger holdings saw steeper declines, as households of all quintiles saw their stock portfolio decline by between 19% to 34% since the fourth quarter of 2021, according to Joanne Hsu, director of the university's Surveys of Consumers.

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Why It Matters: The probability of stock price gains has fallen miserably since the start of the fourth quarter in 2021, as it hit 62% then and is now less than 44%, the lowest since 2012.

The last time a decline of this size and speed was observed in the data was just before the 2008 financial crisis, in the four quarters following the third quarter of 2007, the report said.

Although this does not mean there will be a financial crisis, it signals that investors are unsure of the macroeconomic headwinds and expect further interest rate hikes from the Fed.

Lower income stockholders have the highest sentiment on stock price gains in the year ahead, while higher-income investors have the lowest sentiment next to retirees. As high income households carry a majority of the consumer spending, higher interest rates could create a negative wealth impact on spending, Hsu said.

Additionally, if the market falls even more, those 65 or older could see a negative impact on their living standards in the form of lowering how much they can spend during retirement.