Half of individual investors now describe themselves as “bearish” for the first time since 2013. The latest AAII Sentiment Survey shows greater polarization, with neutral sentiment falling to an eight-year low.
Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded for a second consecutive week, rising 6.7 percentage points to 31.5%. Even with the big increase, optimism remains below its historical average of 38.5% for the 14th time in 16 weeks.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, plunged 9.7 percentage points to 18.2%. This is the lowest reading since November 11, 2010 (14.0%). Neutral sentiment remains below its historical average of 31.0% for the eighth time in nine weeks.
Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 3.0 percentage points to 50.3%. Pessimism was last higher on April 11, 2013 (54.5%). The rise keeps bearish sentiment above its historical average of 30.5% for the 12th consecutive week and the 15th time out of the last 16 weeks.
Since we started the AAII Sentiment Survey in 1987, bearish sentiment has only been at or above 50% approximately 60 times. Put another way, this week’s bearish sentiment reading ranks in the top 4% of all weekly readings. Neutral sentiment is also extraordinarily low, ranking in the bottom 100 out of nearly 1,640 weekly results.
Historically, unusually high levels of bearish sentiment have been followed by slightly better-than-median returns in the S&P 500 index over the following six- and 12-month periods. Unusually low levels of neutral sentiment have been followed by worse-than-median returns for the S&P 500. However, it’s important to note that there have been past periods when neutral sentiment was unusually low and bullish sentiment was unusually high.
The survey period runs from Thursday through Wednesday. Reminders to take the survey are emailed to a rotating group of AAII members every Monday. Many AAII members follow long-term strategies and do not alter their strategies in response to the ongoing volatility. However, this is not universally the case, as cash allocations reached a 33-month high last month according to our November Asset Allocation Survey.
Market volatility and worse-than-anticipated returns are influencing individual investors’ outlook for the stock market. Also having an influence are Washington politics (including President Donald Trump and the change in House leadership), tariffs (particularly the ongoing trade war with China), corporate earnings, the Federal Reserve, valuations and concerns about the pace of economic growth.
This week’s special question asked AAII members whether the Federal Reserve should continue to raise interest rates. Respondents were split. Slightly more than two out of five respondents (42%) think the pause button should be hit. Many of these respondents think the Fed should wait to see additional data, that growth is slowing or that there isn’t enough inflation to justify further monetary tightening. Approximately 35% believe more rate hikes are warranted. Many of these respondents think the economy can withstand further increases, inflation needs to be kept in check, rates need to be normalized or that raising rates will create room to respond to future economic problems. Others think rate hikes should continue but at a slower pace. About 13% of all respondents think future changes in monetary policy should be based either on the data or events abroad, as opposed to being based on a preset path.
Here is a sampling of the responses:
- “Yes, but at a slower rate. Inflation is the key. If potential inflation is going higher, then interest rates should rise.”
- “No. Inflation seems to be in check and further increases could cause a recession.”
- “It seems like this would be a good time to pause and wait for more economic data to determine the course of action going forward.”
- “I believe they should watch the domestic and international economic indicators and decide as they go, data driven.”
- “Yes … if they can’t get rates up, they will have no leverage when they actually need to lower rates.”
This week’s AAII Sentiment Survey results:
- Bullish: 31.5%, up 6.7 percentage points
- Neutral: 18.2%, down 9.7 percentage points
- Bearish: 50.3%, up 3.0 percentage points
Historical averages:
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
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The AAII Sentiment Survey has been conducted weekly since July 1987. The survey and its results are available online.
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