Gallup recently released data from a survey of over 1,000 U.S. investors where findings reported more than half of polled investors have not ruled out the possibility of moving out of stocks if interest rates rise.
Survey respondents also largely believe the U.S. economy will see rising interest rates in the near future, and the vast majority believes this increase in rates will be modest.
There are a number of explanations behind why rising interest rates could affect a stall or drop in the market, but we’ll worry about just one today, substitution. For years, some have speculated that low interest rates have pushed investors into a higher stock allocation than they would otherwise desire. This move to stocks comes purely due to a need for higher return on assets that interest based assets couldn’t deliver.
Gallup data largely reflects a sentiment among investors that would buck this trend, but there is a not so insignificant minority that nods in complete agreement (13% of the entire sample population).
Interestingly, less than 50% of those pulled claim they are unequivocally committed to stocks regardless of rising interest rates. The good new is, the majority of those who aren’t ruling out a move away from stocks rate their likelihood as “not too likely.”
But again a hardy minority (almost one-quarter of respondents) declared themselves as at least “somewhat likely” to make the move if interest rates tick higher. This may not seem like a lot, but a smaller population than this (23% of retail investors with at least $10,000 invested in the market) could cause serious downward pressure on stock prices if leaving all around the same time.
Multivariate analysis could do a great job of peering into additional possibility of more or less people planning to leave stocks based on where they view likely future interest rates and their own portfolio. Unfortunately, that data was not released in this survey.
Regardless, we talked on the last Financial Procast about the possibility that what many have regarded as a stylized trend for people to buy and sell at the wrong time could just be a mistake of assuming exactly when and why people are buying or selling stocks. One thing that we didn’t emphasize was the need to be at least moderately aware of consumer sentiment as it relates to the retail buying and selling of any security as it can have dramatic impacts on prices and whether or not someone makes money.
While I want to be very clear about the fact that I’m not presenting this as investment advice (and I’ll throw in the typical recommendation that you seek out individualized advice from a personal financial advisor) if the Fed continues to express a friendly nature to increasing interest rates, keep a very close eye on selling volume.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.