AAII Sentiment Survey: Optimism Falls To A New Post-Election Low

by: AAII

Summary

Optimism is at its lowest level since before the presidential election (November 2).

At the same time, neutral sentiment is at a two-month high and pessimism remains above its historical average.

More than 4 out of 10 surveyed investors say that small-cap stock performance has little to no impact on their market outlook.

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.

Historical averages:

  • 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.

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