Grand Canyon Times

High inflation was a hallmark of 2022 and its effects might well linger into the future as people, besides curtailing some spending, also were dipping into their savings plans, Vanguard representatives say.

Despite the prospect of paying IRS penalties, people requested a record amount of hardship withdrawals from IRAs in 2022. That could mean a decline in the financial stability of households is looming as it indicates a future “deterioration” in the financial health of people. 

“The recent increase in households drawing on their employer-sponsored retirement accounts, however, could be a sign of some deterioration in the financial health of the U.S. consumer,” Fiona Greig, Vanguard’s global head of investor research and policy, said on the company website. 

The number of workers taking cash from their employer retirement plans through new loans, non-hardship withdrawals and hardship withdrawals all rose in 2022. Vanguard views the record high for hardship withdrawals, which are permitted only to cover an "immediate and heavy financial need,” as the most concerning of those trends. Hardship withdrawals are subject to income taxes and a potential 10% early withdrawal penalty from the IRS. Since all three indicators increased in 2022, Vanguard sees an increased need for household liquidity.

Consumer sentiment has also plummeted when compared to three years ago. The University of Michigan reports that as of October, the sentiment index for the West region, which includes Arizona, is 58.6, compared to 89.6 in October 2019. The current index is 60.4, down from 107.9.  The consumer sentiment index is the leading economic indicator for trends in the U.S. economy. It gauges whether consumers are going to spend, how they will spend and what they will spend on. 

Vanguard researchers also said that investors are feeling pessimistic about the short-term outlook for the stock market. The company surveyed more than 2,000 Vanguard investors, and analyzed data on the accounts of approximately 5 million employer-sponsored retirement plan participants in roughly 1,700 plans Vanguard administers in assessing the situation. The survey found that investors expect the U.S. stock market to rise by a mere 0.6% over the next 12 months,. That is the lowest level since the survey began in 2017. Investors are more optimistic longer term, with data showing they expect an average annual stock market return of 7.2% over the next 10 years.

Investors also are more worried now about a stock market crash or a sharp economic downturn. Investors surveyed estimated the likelihood of a stock market disaster in the near term at 8.2%, a five-year high. A market crash is described as a decline of 30% or more. The probability of an economic disaster, defined as an average of -3% annual Gross Domestic Product (GDP) growth over the next three years, rose to 8.0%. This is on par with the data from the second quarter of 2020, just after the COVID-19 outbreak hit and while the market was experiencing unprecedented volatility in light of shutdowns across the country. 

”Investors may increasingly be worried about the prospect of a stock market crash or a recession in the short term,” Andy Reed, head of investor behavior research at Vanguard, said. “Overall,” he said, “our findings suggest that investors acknowledge the possibility of worst-case scenarios and are bracing for short-term pain, but still maintain a positive outlook over the long run.”

The survey results show that despite talk about a recession, investors expect annual GDP growth to average 2.7% over the next three years. This is not far from its historical average of 3% since 1960. The survey also found that there is a growing gap between short-term and long-term expectations, with the 10-year growth figure reaching a new high of 4.2%, while the three-year expected growth figure was slightly below average. 

"Investors are showing an increasingly differentiated view of the market versus the economy, and long-term versus short-term effects,” Xiao Xu, a Vanguard investment strategy analyst and the survey’s lead researcher, said.

Vanguard has been conducting a bimonthly survey on the U.S. stock market and economic growth expectations since February 2017. The survey is conducted in partnership with academic researchers from the Yale School of Management, the Stanford Graduate School of Business and the New York University Stern School of Business.

The survey is sent to a random sample of 2,000 Vanguard retail and 401(k) investors. The sample group holds approximately $2 trillion in assets at Vanguard. The responses from the survey may be useful for advisors, plan sponsors, researchers and other investors who wish to gauge current sentiment among individual households and compare it to the market.