U.S. investors optimistic overall but don't want rate hikes from Fed

U.S. investors are not supportive of further interest rate hikes, with a majority surveyed by Wells Fargo — 61 percent — saying the Federal Reserve should not continue to raise rates, up from 46 percent surveyed in May. Nearly half of those investors — 48 percent — say that raising rates would be “bad” for the economy, outweighing 16 percent who say rate hikes would be beneficial. Thirty-seven percent say raising rates “won’t make much of a difference” for the economy. In addition, 47 percent of surveyed investors say their income has not kept up with the rate of inflation over the past four years.

These finding are from the fourth quarter Wells Fargo Investor and Retirement Optimism Index survey, conducted Nov. 12-20 and released in Salt Lake City earlier this month. The survey is based on 1,022 U.S. adults with $10,000 or more invested in stocks, bonds or mutual funds. 

The Wells Fargo Investment Institute expected the 25 basis point rate hike that came from the Federal Open Market Committee meeting that concluded on Dec. 19. “Our current outlook is for three additional rate hikes over next year before the Fed ends its current rate hike cycle,” said Brian Rehling, co-head of global fixed income strategy for the institute.

Only 11 percent of investors in the fourth-quarter poll describe the current U.S. economy as “booming,” but another 50 percent consider it “solid.” Despite this positive assessment, a significant minority, 39 percent, use the words “shaky” or “weak.” 

Separately the poll finds more than six in 10 investors perceiving the economy to be about as strong as it has been reported to be (40 percent) or stronger than reported (23 percent). Meanwhile, 37 percent say the economy is “not as strong” as reported. 

The Wells Fargo Investment Institute does not foresee a recession next year, though risks increase beyond 2019. 

The Wells Fargo Investor and Retirement Optimism Index, which is a consumer-based barometer of how investors view the investing climate, didn’t budge in the fourth quarter, coming in at 98, the same level as in the third quarter. The index has hovered near 100 for most of the past two years, following a 16-year period when it was consistently below that level. 

A slight majority of surveyed investors, 53 percent, say they have faith in the Federal Reserve to make the right decisions on interest rates. This includes 8 percent who have a “lot of confidence” in the Fed and 45 percent who have a “fair” amount of confidence. At the same time, close to half — 47 percent — have only “a little” (38 percent) or “no trust” (9 percent) in the Fed’s decision-making on interest rates. 

As much as investors oppose further interest rate hikes, inflation could be an even bigger stressor for investors. 

Seventy percent are concerned that inflation could go “a lot higher” versus 30 percent who are more worried that interest rates could go “a lot higher.” While the vast majority of retired and non-retired investors see inflation as the greater risk, retired investors (75 percent) are a bit more likely than non-retired investors (67 percent) to be wary of inflation.

More than eight in 10 of the investors surveyed believe a potential trade war with China will increase prices and likely raise inflation in the U.S., including 47 percent who consider this “very likely” and 37 percent “somewhat likely.” Just 16 percent say it is unlikely that a trade war with China would force U.S. prices higher.

“Investors would likely cheer news of a solid and definitive U.S. trade agreement with China. Continued tensions in the U.S.-China trade dynamic could further exacerbate uncertainty in U.S. financial markets,” said Rehling. 

The poll, conducted prior to the G-20 meeting and negotiations between U.S. President Donald Trump and Chinese President Xi Jinping on trade that ended Dec. 1, found that a slight majority of investors, 53 percent, feel worried about a U.S.-China trade war versus 47 percent who are not worried. 

As investors grapple with concerns on inflation and trade, only 16 percent state that they’re “very concerned” about the recent sharp volatility in the markets. A strong majority of investors — 68 percent — say that they’re comfortable riding out a 500-point drop in the stock market in a single day and therefore maintaining their equity positions.

Investors surveyed expect to live to a median age of 85, with 47 percent saying they will live between the ages of 86 to perhaps 96 or longer. Nine percent say they will live past age 96. 

According to the survey, 52 percent say they would be willing to take “only a little risk” or “no risk at all” to generate higher returns on their investments. Forty-eight percent would be willing to take “a lot” or “a fair amount” of risk. Of the 47 percent of investors who see themselves living past 86, 51 percent say they would be inclined to take risk to potentially generate higher returns. 

Asked how likely it is they could remain “financially comfortable” if they live to 100, just 15 percent of investors say it’s “very likely,” and another 40 percent say “likely.” Forty-four percent say maintaining financial comfort is “not likely.”

“With lengthening lifespans in the modern age, and low yields in savings accounts, a question for investors is ‘how much risk are they willing to take to generate return?’ especially if they are going to live into their 90s. We see essentially a split among investors, with a little less than half willing to take on risk to generate return,” said Rehling.