Those conclusions are drawn from two sources: a survey of over 2,000 Vanguard investors on their outlook on the stock market and the economy; and data on accounts of roughly 5 million employer-sponsored retirement plan participants in roughly 1,700 plans administered by Vanguard.

The results of our latest survey, conducted every two months by our investor behavior research team, reveals a historic gap between short-run pessimism and long-run optimism.

On average, Vanguard investors responding to our latest Investor Expectations Survey anticipate the U.S. stock market will rise by a meager 0.6% over the next 12 months, the lowest level since we started our survey in 2017 (see the orange line in the chart below). That sentiment stands in sharp contrast to the long-term confidence shown by the expectation of an average annual stock market return of 7.2% over the next 10 years (the green line in the chart below).

“The widening gap between short-run pessimism and long-term optimism suggests that investors may hold a more nuanced view of market performance across time,” said Xiao Xu, a Vanguard investment strategy analyst and research lead for the survey. “Rather than extrapolating the latest headlines far into the future, investors appear to be maintaining a consistent long-term outlook that is conducive to a disciplined, stay-the-course approach.”

Despite talk of a possible recession, investors expect annual GDP growth to average 2.7% over the next three years—not far from its historical average of 3% since 1960 (the orange line in chart below).¹ However, here too is a growing gap between short-term and long-term expectations: While the three-year expected growth figure was slightly below average, the 10-year figure hit a new high of 4.2% (the green line in chart below).

"Investors are showing an increasingly differentiated view of the market versus the economy, and long-term versus short-term effects,” Xu said. “Confidence in the long-term economy peaked in the same month that confidence in the short-term stock market plummeted."

This index, which is a component of the broader survey, indicates investors are more worried now about extreme events such as a stock market crash or a sharp economic downturn.

In the current survey, investors estimated the chance of a stock market disaster in the near term at 8.2%, a five-year high (the orange line in chart below). In other words, investors believe there is a 1-in-12 chance that the market will drop by 30% or more in the next 12 months. The probability of an economic disaster—defined in the survey as an average of –3% annual GDP growth over the next three years—rose to 8.0% (the green line in the chart below). That is on par with the second quarter of 2020, just after COVID-19 had broken out and while the market was experiencing unprecedented volatility.

"Investors may increasingly be worried about the prospect of a stock market crash or a recession in the short term,” said Andy Reed, head of investor behavior research at Vanguard. “Overall, though, 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."

Our retirement research team’s analysis of retirement plan withdrawal behavior shows that more investors are turning to their retirement savings for cash in 2022.

A surprising side effect of the global pandemic was an improvement in U.S. household balance sheets. In 2020, even as economic growth collapsed and unemployment hit its highest levels since the Great Depression, household savings rates surged. The spike reflected both the government stimulus that put cash in Americans’ bank accounts and the limited opportunities to spend in a shuttered economy.

“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,” said Fiona Greig, global head of investor research and policy.

The chart below shows the share of workers taking cash from their employer retirement plans through new loans, nonhardship withdrawals, and hardship withdrawals from January 2004 through October 2022. Currently, all three indicators are on the rise in 2022, suggesting an increased need for household liquidity.   

Most concerning is the rise in hardship withdrawals, which have reached an all-time high in the chart below (orange line). They are permitted only to cover an “immediate and heavy financial need,” according to IRS rules, and are subject to income taxes and, potentially, a 10% early withdrawal penalty.

Vanguard’s investor behavior research team has been collecting Vanguard investor expectations on U.S. stock market returns and U.S. GDP growth since February 2017. The survey runs bimonthly, in February, April, June, August, October, and December. A special survey was conducted in March 2020 during the market crash.

This survey poses 13 brief questions about U.S. stock market and economic growth expectations to a random sample of 2,000 Vanguard retail and 401(k) investors. It is conducted in partnership with academic researchers Stefano Giglio of the Yale School of Management, Matteo Maggiori of the Stanford Graduate School of Business, and Johannes Stroebel of the New York University Stern School of Business.

The survey respondents are a random sample of U.S.-based Vanguard investors invited by email to participate. About 80% of the sample is drawn from our retail clients and about 20% from participants in employer-sponsored defined contribution retirement plans. To be included, investors also must have opted in to receive Vanguard statements via email, be over age 21, and have total Vanguard assets of at least $10,000. Overall, this sample group holds about $2 trillion in assets at Vanguard. We receive about 2,000 responses from investors in each period the survey is conducted.

The responses may be of use to advisors, plan sponsors, researchers, and other investors wishing to gauge current sentiment among individual households and calibrate what a client thinks compared with the market.

• Vanguard investors stay the course, even amid their flagging expectations (article, issued July 28, 2022)
• Investor expectations: Collapse and subsequent recovery in the COVID crisis (8-page PDF, issued July 2021)
• Cash panickers: Coronavirus market volatility (4-page PDF, issued July 2020)
• Investor expectations: A new survey (16-page PDF, issued February 2020)