February is often a dreary month as winter drags on and skies remain gray. Last month, the mood of retirement investors matched the weather.
Retirement confidence plummeted in the second month of 2023, according to new data from Arizent's Retirement Advisor Confidence Index (RACI). As stocks wobbled downward and disappointing news emerged about inflation, client optimism sank to its lowest point since October last year.
"Investors are growing weary of watching their account balances decline," one financial advisor told RACI's survey. "It is becoming harder to convince them they should invest in something other than [certificates of deposit]."
From January to February, RACI's composite score — an aggregate of various confidence indicators — slid from 52.9 to 48.1. Scores above 50 indicate rising confidence, while those below 50 reflect a decline, which means last month the trend switched directions.
The sudden plunge continues the yo-yo-like fluctuations in retirement confidence over the past five months. The composite score inched downward in October last year, then rose precipitously in November, then fell sharply in December, jumped even more dramatically in January, only to fall to its new doldrums in February.
The latest dive was driven partly by a drop in risk tolerance. From January to February, clients' appetites for taking chances fell from a score of 55 to 47.1.
"The market outlook is making clients uneasy," one advisor said. "[They're] making more conservative choices."
That aversion to risk seemed to lead to an aversion to stocks. Investment in equity-based securities grew much less quickly last month, dropping from a score of 60.3 in January to 50.8 in February.
In general, investment in retirement plans was lackluster. Total contributions to retirement accounts grew more slowly last month, dropping from a score of 59 in January to 57.8 in February.
Wealth managers blamed a number of factors for the grim mood of their customers. Most of all, they pointed to February's poor stock market performance, inflation and rising interest rates.
"Clients remain very concerned about the state of the economy and the Fed's actions," one advisor said.
Economically, it was a disappointing month. Stocks rode a descending roller coaster, finishing February with the S&P 500
Meanwhile, inflation cooled, but much less than expected. After six straight months of significant decreases, the year-on-year change in the consumer price index only
On the first day of February, the Federal Reserve raised interest rates less than usual, boosting the federal funds rate by only a quarter of a point. But less than a week later, Chairman Jerome Powell indicated that larger rate hikes could be on their way.
"The reality is we're going to react to the data," Powell said on Feb. 7. "So if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in."
This was not reassuring to many retirement investors.
"The market turbulence and higher interest rates have put fear into my clients," one advisor said.
But not every wealth manager was discouraged. One said their clients were "gaining confidence in a soft landing" for the economy. Another expected "interest rates to lower through the year, making a good case for growth."
Another was confident that their clients would weather the storm, regardless of what the central bank does.
"Staying the course in the market," the advisor said. "Waiting on the Fed to get out of the way."