Pandemic savings may be cushioning investors

There has been an obvious disconnect between investor sentiment and investor behaviour this year — an anomaly that may be explained by savings accumulated during the pandemic.

Surveys show sentiment has been miserable for months now. However, flows into equity funds have remained “relatively strong”, notes Schwab’s Liz Ann Sonders. Strategists have puzzled over this disconnect for months. US households were among the biggest buyers of stocks in 2020-21, Barclays noted recently, so many retail investors are deep in the red. Nevertheless, there has been little sign of investor capitulation.

Healthy household fundamentals due to high accumulated savings and a strong labour market means these financial losses are “likely bearable for most”, suggests Barclays. That’s echoed by Ritholtz Wealth Management’s Michael Batnick, who says the bear market has been “tolerable for most Americans” due to strong employment (at 3.5 per cent, unemployment is the lowest since 1969) and excess savings.

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This thesis is borne out by a recent Federal Reserve study showing US households accumulated $2.3 trillion in savings in 2020-21, above and beyond what they would have saved if financial trends had grown at pre-pandemic trends.

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Since then, households have used about a quarter of those excess savings. That leaves them with a healthy financial cushion — for now. The danger, says Barclays, is that recession hits, people lose jobs and start digging into savings. An eventual retail capitulation, it cautions, could yet threaten equities.