Have investors turned the page from a disappointing 2022? Recent research from Valley Forge, Pa.-based Vanguard suggests a growing optimism around stocks and the economy.

Not only are investors expressing more short-term confidence, but they also appear to have largely avoided locking in losses during last year’s down markets, according to Vanguard’s recent Investor Pulse Research, consisting of a December survey of over 2,000 Vanguard investors and analysis of activity among Vanguard’s about 5.5 million retail investor client households and 4 million participant households in Vanguard-administered retirement plans.

Over the next 12 months, investors expect a 2.7% return from the stock market, a significant increase from the 0.6% expected returns in October of last year. When it comes to expected returns over the next decade, however, investor confidence has sagged slightly to 7% in the December survey, down from 7.2% in October.

In fact, while investor’s 12-month return expectations have bounced between 0.6% to more than 7% over the past five years, the 10-year annualized return expectations have remained consistently range-bound and flat near the 7% mark.

“Elevated market and economic uncertainty suggest a gap between short-run pessimism and long-run optimism may persist in 2023,” wrote the Investor Pulse’s authors.

Economic Expectations
Investor sentiment about the economy follows a similar short- and long-term divergence, with 10-year annualized GDP growth expectations consistently running between 3% and 4.2% over the past five years, and 12-month expectations swinging between 2% and 4% during the same period.

In the latest survey, expectations for 12-month GDP growth rose to 3% in December from 2.7% in October 2022, and expectations for 10-year average annualized GDP growth slightly slipping to 4% in December from 4.2% in October.

Rising short-term expectations are also buoying another Vanguard statistic, its Fear and Doubt Index, which tracks investor estimates of the probability of a stock market disaster including a drop of 30% or more within the next 12 months, and an economic disaste including a -3% GDP growth over the next three years.

In December, investors estimated a 6.2% chance of a stock market disaster, a decline from a five-year high of 8.2% in October. Survey respondents also estimated a 6.6% chance of an economic disaster, down from 8% in October.

Vanguard Investors Stayed Put
Vanguard, a name that has become virtually synonymous with the patient, passive, low-cost and hands-off investing championed by its late founder, Jack Bogle, reports that its clients did not increase their trading activity during the volatility and down markets of 2022.

In fact, household trading activity declined at Vanguard in 2022 compared to 2020 and 2021, according to the report, with fewer investors participating in trading and a smaller proportion of assets on the move. When Vanguard investors did trade, seven out of 10 trades were into equities. Both retail investors and retirement plan participants followed these patterns.

“This suggests investors not only didn’t panic—they may have seen the down market as an opportunity to buy stocks at a discount,” said Fiona Greig, Vanguard’s global head of investor research and policy, in released comments. “Investor trading patterns were more consistent with long-term confidence than short-term concerns, suggesting that investors are maintaining discipline and perspective in turbulent times.”

Vanguard’s Investor Pulse research consists of a bimonthly survey conducted from a random sample of 2,000 Vanguard retail and 401(k) investors and analysis of Vanguard’s retail and retirement plan account activity.