AAII Sentiment Survey: Optimism Falls To An Extraordinarily Low Level

Summary

• Bullish: 20.2%, down 5.8 percentage points.
• Neutral: 31.3%, up 4.2 percentage points.
• Bearish: 48.5%, up 1.6 percentage points.

Optimism among individual investors about the short-term direction of the stock market is at its lowest level in over four years. The latest AAII Sentiment Survey also shows higher levels of neutral and bearish sentiment.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 5.8 percentage points to 20.2%. This ranks among the 40 lowest readings ever recorded by the AAII Sentiment Survey. Optimism was last lower on May 25, 2016 (17.8%). The drop keeps bullish sentiment below its historical average of 38.0% for the 21st consecutive week and the 26th week this year.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 4.2 percentage points to 31.3%. The historical average is 31.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 1.6 percentage points to 48.5%. Pessimism is above its historical average of 30.5% for the 23rd consecutive week and the 25th time this year.

As noted above, this week’s bullish sentiment ranks among the 40 lowest readings out of more than 1,700 weekly results. Meanwhile, bearish sentiment remains at an unusually high level for the 19th time out of 21 weeks. Historically, both have generally been followed by above-average and above-median returns for the S&P 500 index, though the link is stronger for unusually low optimism than it is for unusually high pessimism.

In this week’s special question, we asked AAII members to share their thoughts about the new record highs set by the Nasdaq composite.

More than one-third of respondents (35%) say the new record highs were primarily driven by large-cap companies, especially companies in the technology industry. This compares to 30% of respondents who say this indicates a rising market bubble which will likely result in a recession. About 15% of respondents say the Nasdaq does not reflect actual market health and the market is too optimistic. Additionally, 10% of respondents say that they think the Federal Reserve’s efforts to support the economy are the main driver of the market highs. Other respondents say that they think the market will correct after the election (4%).

Here is a sampling of the responses:

• “The shares of too few companies drive the market’s cumulative results and fail to convey the broad weakness of the economy. I fear this is a formula in the U.S. for a more realistic retrenchment of the overall market. The Nasdaq’s highs appear to be vulnerable.”
• “It’s a bubble. Eventually, the coronavirus pandemic is going to tank the economy and cause a recession. Technology and medical/pharmaceutical companies are hot right now but will eventually take a hit due to the coronavirus.”
• “There is a disconnect between the economy and the stock market. Furthermore, the performance of the Nasdaq is being driven by only a few large-cap technology companies.”
• “I believe that a correction is coming as valuations are too high, but the market will continue to grind higher because of all the Fed liquidity in the market.”
• “The market currently is ignoring the pending liquidity crisis. Eventually, the Fed goodie truck will be empty.”

This week’s AAII Sentiment Survey results:

• Bullish: 20.2%, down 5.8 percentage points
• Neutral: 31.3%, up 4.2 percentage points
• Bearish: 48.5%, up 1.6 percentage points

Historical averages:

• Bullish: 38.0%
• Neutral: 31.5%
• Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987. The survey and its results are available online.

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