Interest-rate hikes spark investor exodus from stock market

Safer financial instruments offering greater returns

Interest-rate hikes spark investor exodus from stock market

A recent survey revealed that individuals are adjusting their investment habits in response to rising inflation and higher yields on secure cash accounts.

According to a study conducted by Bankrate, more than half of U.S. stock investors have either bought, sold, or withheld money from the stock market because of inflation, favourable returns on cash investments, or both. Among American adults who hold retirement or investment accounts, 52% stated that they have taken such actions, while 49% reported that they have either taken no action or made larger investments.

However, investors are not expected to remain passive. However, investors are not expected to remain passive. The study indicates that a greater number of younger individuals are planning to increase their investments, with 45% intending to invest the same amount in stocks this year as they did in 2022, and 27% planning to invest even more.

In comparison to 19% of Gen Xers and 9% of baby boomers, Bankrate found that 53% of Gen Z investors and 43% of millennials want to increase stock investments. Both generations have a greater propensity to boost stock investments in 2023 because of inflation and rising interest rates. Additionally, the number of Americans with stock-related assets is projected to be higher in 2023 than in 2022.

“When investors are faced with adverse market conditions, often the best course of action is to do nothing or better yet, invest more,” Bankrate Chief Financial Analyst Greg McBride said.  “Nearly half of investors, 49%, did so, including 54% of Gen X and 57% of baby boomer investors. Gen Z and Millennial investors were much more active in response to inflation and interest rates - buying, selling, and withholding additional investment.”

Since 2023, 25% of stock market investors have moved money out of portfolios tied to stocks or purposely stopped making new contributions. The higher interest rates have prevented more than a third of people from acting, and 18% were not aware of the increased yields on safe-haven assets.

This year, investors' propensity to withdraw funds from stock-related investments or purposefully withhold new investments was higher (26%) than their propensity to make larger contributions (20%) because of elevated inflation. In response to significant inflation, nearly half of investors did nothing, and 9% said they were uninformed of the situation.

Advisors said that the readiness of investors to benefit from these macroeconomic circumstances is a healthy trend.

Next Mission Financial Planning owner, Mike Hunsberger, told ThinkAdvisor via email, “I think it’s good that investors are considering the significant change we’ve seen in interest rates and inflation and how that might impact their investments. The increase in Treasury rates, CDs and high-yield savings accounts may allow people who have a defined need (to) reduce their stock allocation.”

“The critical factor for me is always the time frame when someone may need their money. If it’s less than three years, it should be in safe assets. Beyond five years, stocks have historically performed well and can be key to growing your wealth,” Hunsberger added.

Total Financial Planning's founder and president, Alexis Hongamen, emphasized the significance of current returns for safer financial instruments. In this era of inflation, he recommended that advisors be mindful of the greater returns that lower-risk assets are currently offering and re-evaluate their exposure to risk when the returns from safer investments may be sufficient to meet clients' long-term objectives.

“Inflation is leading many people to invest cash sitting in their bank accounts, which may be good for those who were not fully invested, but bad if that cash was earmarked for a specific purpose, like an emergency fund or a house down payment,” Jeremy Bohne, financial advisor and founder of Paceline Wealth Management, told ThinkAdvisor via email.

“It’s important not to invest cash set aside for an emergency fund, because in the event of a recession, markets are likely to be down when a potential employment gap is most likely.”