Neutral sentiment spiked to a 12-year high in the latest AAII Sentiment Survey. The percentages of individual investors describing themselves either bullish or bearish fell.
Bullish sentiment - expectations that stock prices will rise over the next six months - fell 6.7 percentage points to 28.7%. This is a three-week low. The drop puts optimism below its historical average of 39.0% for the fifth consecutive week.
Neutral sentiment - expectations that stock prices will stay essentially unchanged over the next six months - surged by 14.5 percentage points to 47.2%. Neutral sentiment was last higher on February 6, 2003 (51.4%). This week's jump puts neutral sentiment above its historical average of 30.5% for the 14th consecutive week.
Bearish sentiment - expectations that stock prices will fall over the next six months - pulled back by 7.8 percentage points to 24.1%. The historical average is 30.5%.
Not only is neutral sentiment at an unusually high level, it is at an unusually high level for the third time in five weeks. Historically, unusually high levels of neutral sentiment have been correlated with better-than-average market performance over the following six- and 12-month periods. (See "Analyzing the AAII Sentiment Survey Without Hindsight" in the June 2014 AAII Journal for more information.) There is no guarantee history will repeat in the future, however.
During the past five weeks, there have been notable swings in all three sentiment indicators. Bullish sentiment has fluctuated within a 10-percentage-point range, neutral sentiment has moved within a 14.5-percentage-point range and bearish sentiment has swung within nearly an eight-percentage-point range. The up and down movements have occurred as stock prices have been more volatile, the odds of an interest rate hike occurring sooner rather than later have increased and projections for first-quarter earnings have been reduced.
Keeping some AAII members encouraged is the ongoing bull market, sustained economic expansion, earnings growth and still-accommodative monetary policy. Causing other AAII members to be cautious or pessimistic are prevailing valuations, disappointing earnings or guidance from certain companies, geopolitical events, the pace of economic growth and worries that an even larger decline in stock prices could occur.
This week's special question asked AAII members how they think the average consumer is faring relative to one year ago. Responses were mixed. Slightly less than a quarter of all respondents (24%) said the average consumer is doing better, primarily because of lower gasoline prices and an improved labor market. About 19% described the average consumer as faring somewhat/slightly better, thanks to lower gasoline prices and improved labor market conditions. Roughly 21% said the average consumer is faring about the same, with the lack of wage growth as the most common reason. Nearly 18% of respondents said the average consumer is faring worse due to higher prices (excluding gasoline) and a lack of wage growth.
Here is a sampling of the responses:
- "I think consumers are doing better due to more people being employed and the lower cost of gasoline."
- "Slightly better because of the improved job market and the reduction in gas prices."
- "Less well. Food prices, insurance costs, everything but gasoline is up; wages are flat or are up much less than costs are."
- "Not much better with stagnant wages and continued underemployment."
This week's AAII Sentiment Survey results:
- Bullish: 28.7%, down 6.7 percentage points
- Neutral: 47.2%, up 14.5 percentage points
- Bearish: 24.1%, down 7.8 percentage points
- Bullish: 39.0%
- Neutral: 30.5%
- Bearish: 30.5%
The AAII Sentiment Survey has been conducted weekly since July 1987, and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online here.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.