Do Investors Fear Another Imminent Market Crash?

The disastrous aftershocks of the financial crisis are still being felt throughout Main Street. Despite years of unprecedented intervention from central banks, the nation is witnessing the weakest economic recovery in history. Some investors have a renewed sense of optimism as stocks reach new record highs, but many Americans are still wary of another market crash.

In the first quarter, the Wells Fargo/Gallup Investor and Retirement Optimism Index jumped 12 points to +37, compared to +25 in November. Before the government shutdown drama in Washington, D.C., filled headlines, the index reached +43 last May. During the depths of the financial meltdown, the index plunged to -64. However, the recent rebound is due almost entirely to a rise in optimism among retired investors, who posted a 35-point surge in confidence from last November.

“It is both interesting and encouraging to see that retirees are more optimistic,” said Joe Ready, director of the Wells Fargo Institutional Retirement and Trust, in a press release. “Dating back to May of 2012, retirees have responded to this poll every quarter with much more pessimism about their situation than have the non-retired — this is a real shift, and most likely correlates to the combination of a stronger stock market and the prospect of higher interest rates in the future.”

All three major U.S. indexes gave a record performance in 2013. The Dow Jones Industrial Average jumped 26.5 percent to post its best year since 1995, while the S&P 500 surged nearly 30 percent to log its biggest annual gain since 1997. In fact, the S&P 500 finished 2013 at a record high, which has only happened eleven times since 1927. The Nasdaq gained 38 percent to return to levels not seen since the dot-com bubble.

Despite the rally in stocks and optimism, 62 percent of investors in the survey said they still have fears about significant losses from another market crash. Only 30 percent of investors said last year’s market gains made them less fearful of a downturn. In fact, a majority of investors would prefer a guarantee that their retirement investment is secure, as opposed to high growth potential. Nearly 60 percent of investors think a market correction will happen this year that will erase significant gains, but only 20 percent said they would use the correction as a buying opportunity.

“In the past five years of recovering from the depths of our recession, 2013 was a banner year for stocks, but it does not appear to have mitigated the strong skepticism that I think still exists among average investors; investors appear willing to trade off double-digit stock market growth to avoid the risk of bruising losses so many experienced in 2008 and 2009,” said Ready.

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