Optimism among individual investors about the short-term direction of stock prices is at a new post-election low, according to the latest AAII Sentiment Survey. At the same time, neutral sentiment is at a two-month high and pessimism remains above its historical average.
Bullish sentiment, expectations that stock prices will rise over the next six months, fell 3.3 percentage points to 25.7%. Optimism was last lower on November 2, 2016 (23.6%). The drop keeps bullish sentiment below its historical average of 38.5% for the 13th out of the last 14 weeks.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 1.9 percentage points to 35.6%. Neutral sentiment was last higher on February 8, 2017 (36.5%). The rise keeps neutral sentiment above its historical average of 31% for the fifth consecutive week.
Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 1.3 percentage points to 38.7%. The rise keeps pessimism at or above its historical average of 30.5% for the 10th consecutive week and the 13th out of the last 14 weeks.
This is the third consecutive week with a bullish sentiment reading below 30%. This week's reading is unusually low, meaning more than one standard deviation below the historical average. (The breakpoint is 28.1%.) Historically, unusually low levels of optimism have been followed by above-average gains in the stock market. The S&P 500 has realized a median six-month gain of 6.3% over the following six-month periods. Furthermore, the large-cap index has risen nearly 85% of the time following unusually low bullish sentiment readings versus nearly 72% for all six-month periods between September 1987 and November 2016.
The potential impact that President Trump could have on the domestic and global economy continues to cause uncertainty and/or concern among some individual investors, while encouraging others. At the same time, prevailing valuations and the lack of downside volatility have increased concern about the potential for a forthcoming drop in stock prices.
This week's special question asked AAII members what influence the performance of small-cap stocks has on their outlook for stock prices. More than four out of 10 (43%) respondents said that small-cap stocks either have no influence or have only a small/minimal impact. Some of these respondents said that they do not invest in small-cap stocks, while others say that they only invest in small-cap stocks for diversification purposes.
Conversely, nearly 32% of respondents said that small-cap stocks have a big influence on their market outlook. Some of these respondents noted that small-cap stocks have outperformed large-cap stocks. Others described small-cap stocks as a leading sign for the direction of large-cap stocks. About 9% say that small-cap stocks have a modest impact on their outlook.
Here is a sampling of the responses:
- "They indicate the trajectory of larger stocks. They are the "first responders" to forces affecting the stock market."
- "I do not currently track small-cap stocks."
- "Small cap has no effect on my outlook. Trump has a large impact."
- "Best performers over the long term."
- "Small-cap stocks make up a small amount of my stocks."
This week's AAII Sentiment Survey results:
- Bullish: 25.7%, down 3.3 percentage points.
- Neutral: 35.6%, up 1.9 percentage points.
- Bearish: 38.7%, up 1.3 percentage points.
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
The AAII Sentiment Survey has been conducted weekly since July 1987. The survey and its results are available online.
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.