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U.S. investor optimism sunk to the lowest level since the fourth quarter of 2016 following the market volatility seen at the start of this month, Wells Fargo said Thursday, citing the findings of a Wells Fargo/Gallup Investor and Retirement Optimism Index survey.

Confidence among American investors weakened in the 12-month outlook for the stock market and U.S. employment, according to Wells Fargo, which pointed out that the third quarter Wells Fargo/Gallup Investor and Retirement Optimism Index is now 72. That’s down 13 points from 85 in the second quarter and far below the post-recession high of 117 reached in the fourth quarter of 2017, the firm said, noting in an announcement about the findings that this was the largest quarterly drop for the index in over three years.

And that was prior to U.S. stocks suffering their worst day of the year Aug. 14, when the S&P 500 sank almost 3% and the Dow Jones industrial average plunged 800 points in its worst rout of the year, sparked when the 10-year Treasury rate slid below the two-year for the first time since 2007. The 30-year yield fell to the lowest on record also.

The Wells Fargo/Gallup poll was conducted Aug. 5-11, so, “even before the volatility of the past two weeks, investors were rattled by the market decline at the start of the month, including a nearly 800-point drop in the Dow at the start of the survey period,” Andy Byer, head of Client Service and Advice for Wells Fargo Advisors, said in the company’s announcement.

“I’d prefer not to speculate about what the index would have been if the poll had been fielded later,” he told ThinkAdvisor, adding: “What I do know is that market volatility was the key driver of declining investor optimism in early- to mid-August, and certainly could continue to be a factor moving forward.”

Confidence fell about the same among investors whether they were retired or not, as well as among those with $100,000 or more invested and those with less than that invested, Wells Fargo said of its poll findings.

Investor optimism dropped this quarter across all four components of the index’s economic dimension, including investors’ 12-month outlook for the stock market and 12-month outlook for unemployment, which were each down nine percentage points, the firm said. Investor optimism about economic growth declined six points, while inflation fell five points.

Coupled with reduced confidence in the financial market, the percentage of investors who said now was a good time to invest in the market fell to 59% this quarter from 65% in the prior quarter, Wells Fargo said. Of special significance was the fact that it was the first time in Wells Fargo/Gallup’s tracking of this measure (started in early 2018) that confidence in the market buying climate fell below 64%, Wells Fargo noted.

But investor optimism for all three components of the index’s personal financial dimension was just about flat, the firm pointed out. That included investors’ outlook for reaching their five-year and 12-month investment targets and for maintaining their household incomes over the next year, it said. Investors’ outlooks for their own financial situation in retirement were also steady, with 76% saying they felt very confident or somewhat confident they would have enough money to maintain the lifestyle they wanted through their retirements, it said.

“With the market still up from the start of the year, recent market losses have not cut into investors’ underlying confidence in their portfolio or long-term retirement goals,” Byer said in his statement. “Even with volatile markets, investors should keep their focus on their long-term investment plans, and making sure investments are aligned with their personal risk tolerance and rebalancing portfolios to match their investment objectives,” he said.

The market volatility of this month was driven by issues that included the continued U.S.-China trade and tariff war, currency concerns, bond yield curves and credit spreads, consumer indicators, and declining business and consumer confidence, according to the Wells Fargo Investment Institute report “The Cold Winds of August — Signals to Watch” by Darrell Cronk, a chartered financial analyst and president of Wells Fargo Investment Institute.

“Even by August standards, when market liquidity declines and volatility often rises, this month is delivering a larger than normal amount of unusual events,” Cronk said in the report. “The escalation of the U.S.-China trade conflict on August 1 and subsequent delay of newly proposed tariffs on August 13; the U.S. Treasury’s labeling of China as a currency manipulator, the first use of that designation in 25 years; and unrest and protests in Hong Kong shutting down major transportation arteries — coupled with already slow global growth — all have markets concerned about the path forward,” he explained.

“While we would expect some decline this quarter in confidence overall, given recent news events, any rapid decline would be more consistent with end-of-cycle conditions,” Cronk said, adding: “So far this has not occurred, but it is an important leading indicator that we need eyes fixated upon. Financial markets continue to press to the downside on all of these indicators with some, like yield curve inversion, triggering more ominous signals. With strong year-to-date gains, we believe investors should use this strength to position more defensively and for more challenging times ahead.”

Cronk suggested that investors “stay up in quality across equities and fixed income, reduce exposure to more risky asset classes where fundamentals are deteriorating [and] be patient putting new cash to work.”

The Wells Fargo/Gallup Investor and Retirement Optimism Index measures U.S. investor confidence in the investing climate, including perceptions of the economy and their own financial situation. For the latest survey, investors were defined as U.S. adults with $10,000 or more invested in stocks, bonds or mutual funds. The results were based on a Gallup Panel web study completed by 2,091 U.S. investors, age 18 and older. The sample included 61% non-retirees and 39% retirees. Of the total respondents, 41% reported annual incomes of less than $90,000, while 59% reported incomes of $90,000 or more, Wells Fargo said.

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