AAII Sentiment Survey: Optimism Pulls Back Following Big Rise

| About: SPDR Dow (DIA)


Optimism pulled back, but remains above its historical average for the fourth week in a row. Pessimism is below its historical average for the fourth week in a row.

The previous week's rise in bullish sentiment was the 13th largest three-week increase in the survey’s 29-year history.

Earnings growth is only having a modest, if any, impact on investors' outlook. Nearly half of those surveyed also think that the average consumer is doing better than last year.

Optimism pulled back in the latest AAII Sentiment Survey after having risen significantly over the previous three weeks. Both neutral and bearish sentiment rebounded this week, after having both previously fallen.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell by 6.1 percentage points to 43.8%. The pullback follows last week's reading of 49.9%, which was the highest level recorded by our survey since January 1, 2015 (51.7%). Even with this week's drop, bullish sentiment remains above its historical average of 38.5% for a fourth consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 3.1 percentage points to 31.1%. The increase puts neutral sentiment about even with its historical average of 31.0%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 3.0 percentage points to 25.1%. Pessimism was last lower on August 17, 2016. The increase is not large enough to prevent pessimism from remaining below its historical average of 30.5% for a fourth consecutive week.

This week's results follow a significant shift in sentiment. During the three-week period of November 2 through November 23, 2016, optimism rose by a cumulative 26.3 percentage points, neutral sentiment fell by a cumulative 14.0 percentage points and pessimism fell by a cumulative 12.2 percentage points. The rise in bullish sentiment was the 13th largest three-week increase in the survey's 29-year history. As I will discuss in this evening's AAII Investor Update, on average, the S&P 500 has only been slightly positive over the six-month periods that followed the 12 previous increases in optimism (up six times and down six times). Furthermore, unusually high weekly readings of optimism-as occurred last week-have historically been followed by below-average returns for the S&P 500. The average six-month return for the S&P 500 following such readings is 2.7%.

The election's outcome remains front and center for many AAII members. Some are encouraged by possible changes President-elect Donald Trump could make, while others are uncertain or want to wait to see how his administration's policies and their impact on the market evolve. There are also individual investors who are pessimistic following the election. Beyond the election, the direction of interest rates, the pace of economic and earnings growth, and valuations are influencing individual investors' expectations for the stock market.

Last week's special question asked AAII members how third-quarter earnings have impacted their market outlook. Responses were very mixed. The largest group of respondents (28%) said that third-quarter earnings did not have any impact or had little impact on their market outlook. Many of these respondents said the election's outcome was more influential. About 18% described themselves as being more optimistic due to earnings, particularly over the short term. Conversely, 11% said that earnings remain too low to support current valuations. Others said that they are anticipating more/continued market volatility or want to see how the market reacts to the new administration over the coming months.

Here is a sampling of the responses:

  • "Earnings, not very much. Politics, on the other hand, are having a MAJOR effect."
  • "Earnings were satisfactory, but the market P/E is still high, suggesting trouble ahead."
  • "Quarterly earnings data is mostly just noise-to be ignored."
  • "Earnings have improved my outlook for stocks."
  • "Generally modest earnings translate into modest growth in the market."

This week's special question asked AAII members how the average consumer is fairing relative to a year ago. Approximately 45% view the average consumer as faring better or somewhat better than a year ago. A better job market, low inflation and economic growth were the primary reasons why. Slightly more than 20% think the average consumer is faring about the same as a year ago. Some of these respondents cited a lack of adequate wage growth. Nearly 15% think the average consumer is faring worse, primarily because of a perception that wage growth is not keeping up with inflation.

Here is a sampling of the responses:

  • "About the same. Gasoline prices remain low, but food seems to keep getting more expensive."
  • "Better. Employment is higher, interest rates remain low and inflation is still in check."
  • "Better. Job growth has been steady, wages are up and inflation is low."
  • "Fair to poor because income is not keeping up with real inflation."
  • "I believe the average person is doing better, but not significantly better."

This week's AAII Sentiment Survey results:

  • Bullish: 43.8%, down 6.1 percentage points
  • Neutral: 31.1%, up 3.1 percentage points
  • Bearish: 25.1%, up 3.0 percentage points

Historical averages:

  • Bullish: 38.5%
  • Neutral: 31.0%
  • 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.).

Want to weigh in? Take the survey yourself and see results online here.

If you want to become an effective manager of your own assets and achieve your financial goals, consider a risk-free 30-day Trial AAII Membership.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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