Retirement confidence sinks as “Santa rally” fails to deliver

After a brief holiday season boost, the mood of retirement investors in December was more “ho hum” than “ho ho ho.”

Retirement confidence sank last month as a hoped-for “Santa rally” failed to materialize, according to Arizent’s Retirement Advisor Confidence Index (RACI). As stocks slid, so did investors’ risk tolerance, and they invested significantly less in equities.

“After almost 12 months of this downturn, even some of the buy-and-hold folks are getting nervous despite advice to the contrary,” one advisor told RACI’s survey. “A lot of people are sitting on the sidelines.”

From November to December, RACI’s composite score — an aggregate of different confidence indicators — dropped from 50.9 to 48.7. A score below 50 means confidence is declining, while anything above 50 means it’s increasing. That means the trend switched directions yet again last month, this time from rising to sinking.

“General client outlook is grim,” another advisor said. “Domestic and global economics are not positive.”

The decline was partly driven by a drop in risk tolerance, which fell from 48.3 in November to 42.7 in December.

And as stocks wobbled downward — the S&P 500, for example, fell by 5.9% in December — investors showed little appetite for equities. From November to December, the score measuring client investment in equity-based securities plunged from 57.7 to 51.

Overall contributions to retirement plans were down as well, from 59.7 in November to 57.9 in December.

“I think that my clients are more hesitant to invest in the standard products that they had been previously investing in,” one advisor said. “The climate is very wait-and-see right now.”

This anxiety was quite a change from the previous month, when investors were significantly more optimistic. In November, the RACI composite score shot up by 3.2 points to 50.9, its third-highest peak in 2022. Meanwhile, risk tolerance jumped 5.7 points to 48.3, which means that it was still declining, but doing so less dramatically than almost any other time that year.

Advisors blamed the December downturn on a number of factors, especially stock market volatility. The S&P 500, Dow Jones and NASDAQ all slipped downward last month. In fact, the end of December marked each of those indexes’ worst year since 2008, with the S&P down by nearly 20%.

“This market’s volatility of consecutive months caused much uncertainty and changes to some of our portfolios,” one advisor said.

Meanwhile, though inflation has recently been slowing — the consumer price index rose by only 0.1% in November — advisors said it’s still a major concern for their clients. And the Fed’s medicine for that ailment, in the form of repeated interest rate hikes, isn’t popular either.

“Inflation and further rate hikes have substantially dampened client activity,” one advisor said.

“I think people are starting to get uncomfortable with the length of this correction,” said another.

A few advisors drew hope from the fact that the Fed’s latest rate increase was smaller than usual. On Dec. 14, the central bank raised rates by half a percentage point — still significant, but less than the four consecutive 0.75-point hikes it had implemented since June.

“I think it makes them more hopeful that we are coming closer to the end of tightening, and that could help stocks rebound sooner than later,” one advisor said.

Others were more pessimistic.

“Clients already believed we were in a recession,” another advisor said. “This just confirmed it for them.”