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AAII Sentiment Survey: Pessimism Above 40% For First Time Since 2017

Summary

Bullish: 26.1%, down 5.8 percentage points.

Neutral: 31.2%, down 0.3 percentage points.

Bearish: 42.8%, up 6.1 percentage points.

Pessimism among individual investors about the short-term direction of the stock market is at its highest level in more than year. The latest AAII Sentiment Survey also shows declines in optimism and neutral sentiment.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 5.8 percentage points to 26.1%. Optimism was last lower on August 31, 2017 (25.0%). Bullish sentiment is below its historical average of 38.5% for the seventh consecutive week and the eighth time in 10 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 0.3 percentage points to 31.2%. This is a two-month low. Even with the decline, neutral sentiment remains above its historical average of 31.0% for the eighth consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped by 6.1 percentage points to 42.8%. Pessimism was last higher on March 9, 2017 (46.5%). Bearish sentiment is above its historical average of 30.5% for the third consecutive week.

Bearish sentiment is now at an unusually high level (more than one standard deviation above average). Bullish sentiment, conversely, is now at an unusually low level. Unusually low levels of optimism have been historically followed by above-average and above-median six- and 12-month returns for the S&P 500 index. Unusually high levels of pessimism have historically been followed by above-median, but not above-average, six- and 12-month returns for the S&P 500.

Many individual investors are anticipating continued volatility and/or think that the current political backdrop could have a further impact on the stock market. Trade policy is influencing some individual investors’ sentiment, but not all. While many individual investors either approve of the recent interest rate hike or don’t expect it to affect the stock market, some are concerned about the impact that rising rates will have. Also influencing sentiment are valuations, tax cuts, earnings and economic growth.

This week’s special question asked AAII members how comfortable they are with the current valuations of stocks. Approximately 44% of respondents say valuations are too high. Many of these respondents describe valuations as being high relative to historical measures or as being too high given the current political uncertainties. Conversely, 28% say they are comfortable with the current level of valuations, particularly because of earnings and economic growth. About 20% respondents describe stocks as being fairly valued or otherwise say they focus on the long-term.

Here is a sampling of the responses:

  • “Pretty full. Higher than average P/Es.”
  • “Comfortable. I’m expecting improving earnings and cash flow resulting from the tax law change and continuing moderate economic growth.”
  • “There is too much uncertainty coming from the White House for the given high valuation of stock prices.”
  • “Fully priced, but earnings have been good.”
  • “The market correction in February has resulted in better valuations of stocks.”
  • “I am fairly comfortable with current stock valuations, but am uncertain as to the market direction at this time.”


This week’s AAII Sentiment Survey results:

  • Bullish: 26.1%, down 5.8 percentage points
  • Neutral: 31.2%, down 0.3 percentage points
  • Bearish: 42.8%, up 6.1 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.