Schwab Q3 Survey: 44% Bullish on U.S. Stock Market and 66% See AI as a Significant Market Impact

The Charles Schwab Trader Sentiment Survey for Q3 reveals a shift in trader expectations towards a more optimistic view of the market environment. After two consecutive quarters of heightened recession anticipation, the latest survey indicates a brighter outlook among traders.

Key Findings

  1. For the upcoming three months, 44% of traders are bullish about the U.S. stock market, a significant increase from 32% in Q2. Conversely, bearish sentiment has decreased from 52% in Q2 to 35%.
  2. Although 69% of Schwab’s trader clients believe a U.S. recession is likely, this figure has dropped from 86% in Q2 and 87% in Q1. Among those expecting a recession, 64% now forecast its onset in Q4 2023 (26%) or later (38%). This is a notable shift from the previous quarter, where only 19% predicted a recession in the same timeframe.
  3. Primary Concerns Around Investing: Traders have expressed concerns about the potential of a recession (14%), the Federal Reserve raising interest rates (14%), the political landscape in D.C. (13%), inflation (10%), and market corrections (10%).
  4. The survey, which captures the perspectives of traders at Charles Schwab and TD Ameritrade, delves into primary concerns around investing, the likelihood and expected duration of a recession, and economic data influencing outlook. For instance, 77% of traders are influenced by inflation, 63% by consumer spending, and 55% by the labor market.

James Kostulias, head of Trading Services at Charles Schwab, commented on the findings, stating, “While traders certainly don’t feel we’re entirely out of the woods yet when it comes to an economic downturn, we’re seeing an influx of cautious optimism.” He attributed this optimism to a robust jobs market and relatively low unemployment rates. Despite a slight increase in inflation, it remains significantly lower than the highs of 2022.

Demographic Insights

Older traders are more bullish at 49%, compared to 41% for younger traders and 38% for retirees.

51% of traders believe it’s a favorable time to invest in stocks and other equity-based investments, an increase from 41% in Q2. Moreover, 53% feel they are in a better financial position than a year ago, a jump from 36% in the previous quarter.

Sector and Asset Class Perspective

Traders are most bullish on the energy, information technology, and health care sectors. Real estate is the only sector where the majority (54%) are bearish.

On the asset class front, traders show bullishness towards value stocks, domestic stocks, growth stocks, and equities in general.

AI’s Role in Trading

Artificial Intelligence (AI) is gaining traction in traders’ decision-making. 66% of traders believe AI will have a significant impact on the market in the next 1-3 years. Furthermore, 35% are already incorporating a company’s use of AI in their stock analysis, and 51% are bullish on AI stocks for the next quarter.

The Charles Schwab Trader Sentiment Survey is a quarterly study that included 768 Active Trader clients at Charles Schwab and TD Ameritrade, conducted from July 6 – August 3, 2023.

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What BTC price slump? Bitcoin outperforms stocks and gold for 3rd year in a row

Bitcoin (BTC) may be down over 30% from its record high of $69,000, but it has emerged as one of the best-performing financial assets in 2021. BTC has bested the U.S. benchmark index, the S&P 500, and the gold.

Arcane Research noted in its new report that Bitcoin’s year-to-date (YTD) performance came out to be nearly 73%. In comparison, the S&P 500 index surged 28%, and gold dropped by 7% in the same period, which marks the third year that Bitcoin has outperformed.

Bitcoin vs. S&P 500 vs. Gold in 2021. Source: Arcane Research, TradingView

At the core of Bitcoin’s extremely bullish performance was higher inflation. The U.S. consumer price index (CPI) logged its largest 12-month increase in four decades this November.

“Most economists didn’t see the high inflation coming, as witnessed by the 1-year ahead consumer inflation expectations,” the Arcane report read, adding:

With its 73% gain in the highly inflationary 2021, Bitcoin has proven itself to be an excellent inflation hedge.

Inflation 2021: Actual CPI vs. Expected CPI. Source: BLS, New York Fed

Bitcoin holdings grew among institutional investment vehicles

Loose monetary policies and a sustained fear of higher inflation also prompted mainstream financial houses to launch crypto-enabled investment vehicles for their rich clients in 2021.

Arcane reported an inflow of 140,000 BTC (~$6.56 billion) across spot- and future-based Bitcoin exchange-traded funds (ETF) and physically-backed exchange-traded products (ETP) this year.

Bitcoin exchange-traded fund holdings. Source: ByteTree, Arcane Research

That prompted more Bitcoin units to get absorbed into investment vehicles, underscoring a greater institutional demand for the cryptocurrency.

In contrast, gold-backed ETFs witnessed an outflow of $8.8 billion in 2021, according to World Gold Council’s report published this December.

Global gold-backed ETF flows. Source: World Gold Council

Volatility behind superior performance?

Nonetheless, Bitcoin’s relatively superior performance in 2021 has included periods of high volatility.

Many analysts believe that extreme price fluctuations keep Bitcoin from becoming an ideal inflation hedge. That includes Leonard Kostovetsky, a finance professor at Boston College, who recalled in his blog post that there had been 13 days in 2021 on which the BTC price has moved over 10% in one direction. Excerpts:

“It seems strange to think that a person who is worried about holding dollars because they lost 7% of their value over the last year would be comfortable holding Bitcoin which could (and often does) lose that much value in a single day.”

Arcane too recognized Bitcoin for being more volatile than the S&P 500 in 2021, noting that the cryptocurrency “behaved like a risk-on asset” by merely amplifying the most significant stock market movements.

The researcher cited VIX — a measure of the expectation of volatility based on S&P 500 index options — to exemplify the relationship between Bitcoin and stock markets. It noted that the BTC price fell hard whenever the VIX readings spiked in recent times, underscoring that institutional traders viewed Bitcoin as a risk-on asset.

Bitcoin vs. VIX. Source: Arcane Research, TradingView

As a result, Bitcoin’s potential to fall harder in the wake of a stock market correction also became higher. Arcane too noted that a bearish 2022 for the S&P 500 may end up wiping a big portion of Bitcoin’s gains.

“Therefore, be aware of stock market headwinds in the next year and their possible implications for bitcoin’s short-term price trajectory,” it added.

Related: Arcane Research releases its crypto predictions for 2022

But hedge fund manager Chris Brown went far in predicting an all-and-all Bitcoin doom in 2022. The Aristides Capital’s managing member stated that cryptocurrencies could face massive selloffs ahead as the U.S. Federal Reserve ends its $120 billion a month asset purchasing program followed by three rate hikes next year.

BTC/USD weekly price chart versus Federal Reserve balance sheet. Source: TradingView 

“If the Fed really does hike rates enough to make money considerably less loose, or if markets believe they will, you are going to see certain areas of speculation come to a screeching halt,” Brown said, adding:

The prime example of such asset speculation is cryptocurrency; here lies $2.64 trillion of ‘wealth’ that is backed by nothing and generates no cash flows.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.