Investors are bullish but expect continued market volatility, says Morgan Stanley

Three weeks into the third quarter and investors are feeling optimistic about the market and somewhat confident in the economy, according to Morgan Stanley Wealth Management.

Its quarterly investor survey reveals a bullish sentiment among 55% of respondents, a rise of 3 percentage points quarter over quarter, despite 91% feeling that market volatility will remain and possibly increase through to the fall.

Perhaps this high expectation of volatility, and preparedness for it, is why only 26% of poll participants rank it as their top concern relating to their portfolio, putting it behind recession (31%), and high inflation (52%) even though 54% expected inflation to be under control by year-end.

Most investors expect the market to end the third quarter in positive territory with 58% expecting a rise, a 10-point increase compared to the last quarter.

IT (especially AI), energy, and health care are among the favored industries among those polled.

Asked about the Fed, 54% of respondents think it will navigate a soft landing — this was also the view expressed in a recent BofA survey — and 48% think the U.S. economy is strong enough for policymakers to make further rate hikes this quarter.

INVESTOR UNCERTAINTY

Despite growing optimism, Mike Loewengart, head of model portfolio construction for Morgan Stanley Portfolio Solutions, says there is investor uncertainty.

“We’re beginning to witness a slow shift happening in the investing landscape as we narrow in on the potential end to the Fed’s rate hike campaign,” he said. “But inflation is still very much a part of the conversation and should factor into long-term investing decisions.”

He added that those investors that have shifted allocations to cash should consider the purchasing power risks.

“Investors are missing out on capital appreciation if they’re sitting on the sidelines, and most cannot time the market,” he said. “Bottom line, maintaining a diversified portfolio across asset classes and investments provides the fundamental framework for a long-term investing strategy and can help weather all market conditions.”

AAII SURVEY

The growing sentiment reported by Morgan Stanley is also reflected in the weekly sentiment survey from the American Association of Individual Investors.

This week’s reading shows a 10-point rise for bullishness to 51% with 27% neutral, and 22% bearish.

“This marks the seventh consecutive week that bullish sentiment is above its historical average of 37.5%,” the AAII staff commentary states. “This has been the longest above-average streak since a 13-week stretch from February to May 2021. Bullish sentiment was last higher on April 22, 2021 (52.7%) and is currently at an unusually high level.”