This is the latest in a series of columns about portfolio strategies, financial planning and asset management.
Investor sentiment about the markets, economy and inflation has dropped significantly this month, even as the S&P 500 has held on near record highs, a Vanguard survey has found, prompting experts at the asset manager to suggest a “front page news effect” may be at play.
“Sentiment has taken a turn for the worse but the markets haven't,” Andy Reed, Vanguard’s head of investor behavior, told me in a phone interview Thursday. “And in fact, just in the last few days, the markets are actually slightly up, trading sideways, but sentiment is really quite negative.”
(On Friday, the Nasdaq 100 index and the S&P 500 both dropped around 2%.)
Vanguard’s investor research and insights team was surprised by early findings from their latest investor expectations survey, since there’s typically a strong correlation between the market’s performance over the previous 12 months and clients’ outlook for the next 12, Reed said.
The survey showed a few anomalies, with sentiment on various measures showing unusual movements, notably the lower sentiment amid higher market performance.
“That's a bit of a head scratcher for us because when you look at the overall patterns, in the last couple of events where we saw sentiment dip in a similar fashion, there were really considerable drops in market and economic indicators,” he said, citing February and March 2020 — early in the COVD-19 pandemic – and 2022, when the market declined throughout the year.
“So there's a little bit of a paradox where sentiment is diverging from the market in a way that we just haven't seen before,” Reed said.
The ‘Front Page News’ Effect?
Vanguard noted earlier in the week that the S&P 500 and egg prices both hit all-time highs this month, but said investors seem more concerned about the eggs. The working hypothesis from Reed’s group is that a front page news effect is generating uncertainty, which breeds anxiety.
“Investors normally show robust optimism, even in the face of bad news, and their expectations were flying high in 2024 alongside the market. But since October, investor expectations and concerns over tail risks moved sharply in the negative direction and much closer to those of economists, while inflation concerns loom large,” Reed said in the note.
“Whether it’s the price of eggs or stretched equity valuations, the exuberance of 2024 may have run its course.”
About 2,800 Vanguard clients are included in the survey, fielded on Feb. 11 and ongoing this month. To be included, investors must have opted in to receive Vanguard statements by email, be over 21, and have at least $10,000 in total Vanguard assets. The sample group holds about $2 trillion in assets at Vanguard, which runs the survey every other month.
Investor sentiment dropped significantly across all metrics at magnitudes not seen since 2022, including short-run market and economic expectations, inflation, and the fear and doubt index, with 12-month market expectations dropping from 6% to 7% throughout 2024 to under 5% this month, Vanguard found.
GDP growth expectations dropped from roughly 3.5% in 2024 to 2.5% this month.
Will the Economy Crash?
“Concern over the prospect of market and economic disasters spiked in ways never seen before,” the firm said. Investor inflation expectations, for example, are worse than the current Consumer Price Index inflation rate (4% vs. 3%), while concerns about market or economic crashes have diverged more than ever before in the survey’s eight-year history.
Normally they are closely correlated, within 1% of each other, but investors now see higher chances of an economic disaster than a market crash — a 7.8% chance of an economic disaster versus 5.8% for a market crash, Vanguard said.
“Both numbers are well above the range we saw for most of 2024, when investors pegged the odds of economic disasters in the 4%-5% range and odds of a market disaster in the 4%-4.5% range,” Reed explained. “In other words, the current estimates are 1.3 to 1.5 times higher than last year’s trend.”
The survey’s definition of disaster sets a very high bar, he added. Economic disaster means annual GDP growth of negative 3% over the next three years and market disaster means a drop of 30% in the following 12 months. “Even major events would not reach these lofty criteria, such as the market drop in 2022.”
Vanguard also found twice as many “bears” now compared to what the firm saw for most of 2024: 12.6% of investors in February 2025 predicted negative market returns for the next 12 months, versus only 4%-5% of investors in June, August, and October 2024.
Since Vanguard investors tend to be optimistic in general — their average market expectations are consistently positive across every single survey wave — “we typically keep a close eye on changes in expectations as a signal of sentiment. In the latest wave, the large magnitude, negative direction, and puzzling market context surrounding the change in expectations was noteworthy.”
Reed’s team wondered what could explain investors’ greater uncertainty about the economy and inflation than about the markets.
“One potential explanation is fears about tariffs, trade wars, etc., which ultimately could affect both inflation, the market and the economy,” Reed said.
While the looming prospect of trade wars may explain investors’ market pessimism, another explanation could be that they’ve become more aligned to economists’ and Vanguard’s view that equity valuations are stretched and the market may be due for a correction, he said, adding that the tariff and trade war fears are a more plausible explanation.
Reed, who has a Ph.D in psychology and joined Vanguard from Fidelity in 2022, acknowledged that uncertainty stemming from moves the new White House has taken, such as cuts to agency spending and headcount and their eventual ripple effects, could feed investor worry as well.
Staying the Course
Despite the notably lower sentiment, Vanguard clients appear to be largely sticking with their portfolios so far.
“On any given day over the past two weeks, 98% to 99% of Vanguard retail investors made no trades, which is well within the range of normal trading rates for our clients and speaks to the long-term ‘buy and hold’ investment mentality that we typically observe and encourage,” Reed told me. “Investor anxiety may be on the rise, but it hasn’t reached a boiling point or translated to ‘panic selling’ by any means.”
Investors are human and it’s normal to feel anxious when there’s bad news on the front page, he noted. Nonetheless, Vanguard would like to see investors “stay calm, stay collected, even as chaos may be swirling around them.”
The firm encourages clients to focus on what they can control rather than what they can’t.
“So we can't control the front-page news unfortunately,” Reed said. “In times of instability, uncertainty, very basic steps like making sure you have adequate emergency savings, revisiting your financial plan, your portfolio, do you have the right mix of assets, do you have an all-weather portfolio, something that can handle twists and turns in the market and the economy?
“If the answer is yes, then hopefully we would love to see investors able to sleep at night, remain calm. But again, it is asking a lot because there's a reason why humans experience anxiety. It can be a useful emotion; it can spur us to take action when necessary,” he said.
“It would be unrealistic to expect people to be never anxious, but our hope is that we can encourage investors to take certain actions that could at least help resolve some of the anxiety, even if it doesn't eliminate it entirely.”
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