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AAII Sentiment Survey: Pessimism Surges

Summary

Bullish: 36.1%, up 1.7 percentage points

Neutral: 31.8%, down 9.4 percentage points

Bearish: 32.1%, up 7.8 percentage points

Pessimism in the latest AAII Sentiment Survey surged to its highest level since mid-May, as neutral sentiment plunged to nearly a four-month low. Optimism rebounded modestly. 

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded by 1.7 percentage points to 36.1%. Optimism was last higher on May 3, 2017 (38.1%). This is the 23rd consecutive week and the 28th time out of the last 29 weeks that bullish sentiment is below its historical average of 38.5%. 

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, plunged 9.4 percentage points to 31.8%. Neutral sentiment was last lower on April 26, 2017 (30.2%). Even with this week’s drop, neutral sentiment is above its historical average of 31.0% for the 14th consecutive week and the 19th time out of the last 20 weeks. 

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 7.8 percentage points to 32.1%. Pessimism was last higher on May 17, 2017 (34.3%). This is the also the first time in nine weeks that bearish sentiment is above its historical average of 30.5%. 

Though the Dow Jones industrial average continued to set record highs over the survey period (Thursday through Wednesday), other major indexes declined. The changes in this week’s readings also follow both unusually high levels of neutral sentiment and an eight-month low for pessimism. 

While some individual investors are encouraged by this year’s record highs for the major indexes (even given the modest declines in several of the major indexes over the past seven days), many others have expressed concern about the possibility of a pullback and/or the prevailing level of valuations. The Trump administration remains at the forefront of many investors’ minds and is having a significant impact on sentiment. Other factors playing roles are earnings and interest rates/monetary policy. 

This week’s special question asked AAII members how their sentiment toward the stock market is being influenced by the prospects for tax reform. The majority of respondents (56%) said it’s not influencing their sentiment. Many of these respondents clarified their response by saying they do not anticipate that tax reform will actually occur. Slightly more than 26% say the passing of tax reform, particularly significant tax reform, would boost stock prices. Approximately 5% believe that if meaningful tax reform is not passed, stock prices will fall. 

Here is a sampling of the responses:

  • “The probability of meaningful tax reform is vanishingly small, so it’s not factored into my thinking about investments.”
  • “I don’t put much weight on anything getting done. There is so much divisiveness in politics.”
  • “I am assuming no tax reform. A significant tax cut would make me more bullish.”
  • “Any tax reform will be around the edges, nothing major.”
  • “If tax reform should fail or continues to be delayed, a major correction will ensue.”

 AAII Sentiment Survey

This week’s AAII Sentiment Survey results:

  • Bullish: 36.1%, up 1.7 percentage points
  • Neutral: 31.8%, down 9.4 percentage points
  • Bearish: 32.1%, up 7.8 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.

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.