Souring Retail Sentiment Is A Market Risk

Of late, institutional fund managers and market experts are sounding the alarm about the continued rise of equity markets. They cite a number of market-driving factors: Inflationary conditions are persisting month over month; supply chain disequilibrium continues to hamper business productivity; the Federal Reserve has indicated it will begin tapering its asset purchases and raise interest rates by 2022; and the shock and magnitude of the Evergrande crisis has fanned fears of a full-blown financial crisis.

Worries about systemic, structural factors are legitimate. But so too a simpler metric: The sentiment of consumers and retail investors, whose economic outlook is increasingly pessimistic, according to data from the Allianz Life 2021 Q3 Market Perceptions Study, a quarterly poll of a representative sampling of American consumers.

For one, Allianz’s latest numbers reaffirm an important point: Consumers are still really worried about inflation: 78% of respondents said they expect that inflation will get worse over the next 12 months, while 69% said they were worried that rising inflation would have a negative impact on the purchasing power of their income in the next 6 months. 

Consumer expectation for inflation matters, precisely because it can further drive inflation and become a self-fulfilling prophecy. When individuals and small businesses expect costs to rise, they demand higher pay, while the prices of rent and cost of goods and services rise in tandem. Upward price momentum in labor and real estate markets causes a ripple effect across the economy; the mere expectation of inflation can so easily create even greater inflation. 

Second, Allianz’s study shows that retail investors are increasingly spooked by the prospect of another market crash. More than half (54%) of respondents say they are worried that another big market crash is on the horizon; only 45% expressed this concern in the second quarter. “People were feeling better about market risks to their retirement this summer when we saw that brief return to normalcy before getting a Delta-driven reality check,” said Kelly LaVigne, VP of Consumer Insights, Allianz Life. “They are worried that the increase in COVID infections will cause another recession.”

Fears of the coronavirus pandemic are driving those worries, with 69% of respondents saying they are worried that a Delta-fueled increase in COVID infections will cause another downturn. 

Of course, retail pessimism could drag down equity prices across sectors. The Allianz study found that 70% of Americans believe it is important that a portion of their retirement savings are stashed in asset classes that shield them from market losses. Just as expectations of inflation can lead to more inflation, so can worries about a market correction drive a sell-off in equity prices. If millions of retirees direct their advisors to reallocate their portfolios from equities to bonds and treasuries, it could create a cascading effect, driving the sort of broad market correction feared by all.

If there’s any silver lining to this cloudy retail outlook, it’s that 67% of respondents say they’re keeping some money out of the market to shield it from losses. The high number of investors with cash on the sidelines highlights a key factor behind the Covid-era bull market: liquidity is ample, thanks to government stimulus and enhanced unemployment through the height of unemployment levels and new virus cases, but also thanks to the strong foundations of the U.S. consumer driven economy that, for now at least, is immune to Covid-19.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.