A glimmer of hope? Investor optimism grew in recent months, research shows

As inflation persisted and stocks wobbled, the past three months hardly seemed like cause for investors to grow more optimistic. And yet, according to recent research, that's exactly what's happened.

A new study by the global investment bank UBS shows that from July to October this year, investor optimism actually jumped by 15%. The study surveyed 900 investors and 500 business owners in the U.S. — all of them with at least $1 million in assets or revenue — from July 5 to Oct. 17. At the beginning of that time frame, just 37% felt optimistic about the stock market's short-term future. But by the end, that number had risen to 52%.

What's driving this boost in optimism? Investors pointed to a number of reasons. Almost half — 49% — cited the strong demand for goods and services, 42% pointed out that employment remains high, and another 42% felt the country was "returning to normal" from the COVID-19 pandemic.

But according to one advisor at UBS, there could be another reason: a sense that the bear market may be ending soon.

"I think they're becoming a little more optimistic, short term, because they probably think we're closer to the end of this than we are to the beginning," said Brad Bernstein, the managing director of UBS Financial Services. "We're probably closer to the seventh or eighth inning of this."

Judging by U.S. stocks' performance in October, that optimism appears to have been well founded. The S&P 500 rose 8%, the Dow Jones Industrial Average jumped 14% and even the Nasdaq, which has had a terrible year, rebounded by 4%.

And UBS isn't the only group that's noticed the change of mood. CNN's Fear and Greed Index measures investor sentiment on a 100-point scale, from "extreme fear" to "extreme greed" — less flattering words for pessimism and optimism — by studying movements in the market. From July 1 to Oct. 31, CNN found that investors moved from a score of 25, reflecting "extreme fear," to a 62 — solidly in "greed" territory.

"I think they think the market is looking more attractive right now than it has in a long time," Bernstein said.

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That's not to say investors are optimistic on all fronts. Outside of the stock market, UBS found that 63% were concerned about inflation, 56% were worried about the risk of recession and another 56% were anxious about the national debt.

But in some ways, Bernstein said, bad news for the broader economy is good news for the stock market. As the Fed pummels the economy with higher and higher interest rates, many investors fear this could cause a recession — but that may be what it takes to get inflation under control. And once that happens, investors expect the Fed to ease up.

"The economy is going to get worse before it gets better, and in a contrarian way, I think the stock market is looking for that to happen," Bernstein said.

On Wednesday, evidence emerged that this turning point may be in sight. The latest Consumer Price Index showed that year-on-year inflation has eased, dropping from 8.2% in September to 7.7% in October. Stocks jumped at the news, with the S&P leaping 5.5%.

It's still far too early to say whether the economy has turned a corner, but the optimism of American investors dovetails with a larger, global trend. In addition to its U.S. study, UBS conducted a parallel survey of investors around the world. While 50% of them were optimistic about the stock market in July, by October that number had climbed to 59%.

How can the average investor take advantage of this rising tide? Bernstein offered a few answers, starting with the simplest."No. 1, don't sell," he said.

He also recommended shifting portfolios back to a 60/40 balance of stocks and bonds, if they're not there already, and for taxable accounts, making sure to harvest one's losses. But most of all, he urged investors to talk with their financial advisors.

"It's critical … to be educated about how the market works so you don't react the wrong way," Bernstein said. "And 2022 is certainly a year when you need help."