After two consecutive quarters of recession anticipation, trader expectations are shifting to a more optimistic sentiment overall about the market environment, according to the Schwab Q3 Trader Sentiment Survey
The latest Charles Schwab Trader Sentiment Survey reveals that traders are more bullish on the U.S. stock market than they were in the second quarter; for the next three months, 44% are bullish and 35% are bearish, compared to 32% bullish and 52% bearish in Q2.
While most (69%) of Schwab’s trader clients still think it’s likely that the U.S. economy will officially enter a recession, that figure is down significantly from 86% in Q2 and 87% in Q1. Those who think a recession is likely are also pushing back their expectations for when it will begin and continue to believe it will last less than one year. Among traders expecting a recession, 64% now predict it will start in Q4 2023 (26%) or later (38%) compared to just 19% who predicted a recession would begin in that timeframe last quarter.
“While traders certainly don’t feel we’re entirely out of the woods yet when it comes to an economic downturn, we’re seeing an influx of cautious optimism,” said James Kostulias, head of Trading Services at Charles Schwab.
“This is no doubt thanks to a sunnier economic picture overall this quarter. The jobs market may be cooling somewhat, but it continues to be strong, and unemployment remains remarkably low, especially compared to pandemic-era highs. Even the most recent inflation numbers, while they do indicate a modest rise, are a far cry from the highs we saw in 2022. Concerns may remain, but bullishness is on an upswing.”
Signs of Optimism
Mid-life and older traders are the most bullish (49%) while that number drops to 41% for younger traders and 38% for retirees. While bearishness is on the decline, one in five traders express uncertainty about their market outlook. That lack of clarity is even higher (one in four) among retirees.
Overall, 51% of traders think it’s a good time to invest in stocks, mutual funds and other equity-based investments, up from 41% in Q2. Additionally, 53% feel they are better off financially than they were a year ago compared to only 36% in the previous quarter. Traders largely continue to feel confident in making investment decisions (63%), a number that remains virtually unchanged quarter-over-quarter.
“Retired and younger investors can be particularly sensitive to market swings, so it makes sense that they might feel a little less bullish compared to mid-life and mature investors who have experienced many market cycles over their lifetimes,” said Kostulias. “This experience could lead mid-life and mature traders to feel more comfortable taking calculated risks. This is just one area where the many educational resources and trading tools available at Schwab can make a big difference, and traders are taking advantage of these. Traders say they are now spending more time researching their trades before executing, and our tools can help them to ideate, create, execute, and monitor their trades under multiple conditions and scenarios.”
Sector and asset class outlook
At a sector level, traders are the most bullish on energy (51%), information technology (51%, a significant bump from 38% in Q2) and health care (47%). Real estate is the only sector that the majority of traders are bearish on (54%).
At the asset class level, many traders are bullish on value stocks (46%), domestic stocks (44%), growth stocks (42%) and equities in general (40%). Traders are slightly less bullish on fixed income than the previous quarter, as sentiment ticked down from 42% to 35%.
AI’s impact
Artificial intelligence (AI) is emerging as an important factor in traders’ decision-making, in terms of both the companies they invest in and how they feel the technology will influence the market. Two-thirds of traders (66%) see AI as potentially having a massive or significant impact on the market and 35% are already factoring company use of AI into their stock analysis. Just over half of traders (51%) are bullish on AI stocks for the next three months.
The Charles Schwab Trader Sentiment Survey is a quarterly survey that explores the outlooks, expectations, and perspectives of traders at Charles Schwab and TD Ameritrade.
