AAII Sentiment Survey: Optimism And Pessimism Revert To Unusual Levels

The results from the latest AAII Sentiment Survey show optimism about the short-term direction of the stock market falling back to an unusually low level. At the same time, pessimism rose back to an unusually high level.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased by 7.2 percentage points to 24.7%. The drop puts optimism at unusually low level (below 27.9%) for the 10th time out of the last 13 weeks. Bullish sentiment levels are also below the historical average of 38.0% for the 20th consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, pulled back by 6.7 percentage points to 33.9%. Even with the decline, this is the third consecutive week that neutral sentiment is above its historical average of 31.5%. The decrease follows last week’s neutral sentiment reading that was the highest since the week of January 1, 2020.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped by 13.8% percentage points to 41.4%. The increase puts pessimism at an unusually high level (above 40.1%) for the ninth time out of the last 12 weeks. Bearish sentiment is also above its historical average of 30.5% for the 19th time out of the last 20 weeks.

Historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment and for the bull-bear spread. (This week’s bull-bear spread of –16.7% is unusually low too.) Unusually high bearish sentiment readings historically have also been followed by above-average and above-median six-month returns in the S&P 500.

In this week’s special question, we asked AAII members to share which factors are most influencing their six-month outlook on stocks.

Many respondents listed more than one factor in their responses. Topping the list is inflation, noted by one out of four respondents. Second was the Russia-Ukraine conflict, cited by 21% of all respondents. Around 15% say interest rates are influencing them. Roughly 9% of responses discuss politics, including the upcoming elections and current government administration. Supply chain issues and Federal Reserve decision-making are each named by 5% of respondents. Earnings as a factor is cited by 4%. Coronavirus-related concerns make up only 2% of responses and oil and gas price concerns contribute only 1%.

Here is a sampling of the responses:

• “The war in Ukraine and Russian sanctions are going to continue to cause disruptions in the supply chains of many industries and drive up the prices of many commodities, which will either squeeze profits or fuel even more inflation. Continuing inflation will lead to higher long-term and short-term interest rates additionally putting pressure on stock prices.”
• “High inflation along with the corresponding interest rate increases and inverted yield curve are the biggest headwinds against the market. The Russian-Ukrainian war doesn’t help. It will continue to keep energy resources tight.”
• “The uncertainties of the war in Ukraine and continuing supply shocks combine to cause more inflation and the inevitable demand destruction of rising interest rates.”
• “I think that inflation is increasing faster than anticipated. The Fed may have to get very aggressive with interest rate increases in an attempt to subdue inflation. I think this is very bearish for stocks overall.”
• “Higher interest rates and inflation will dampen economic performance, in spite of tight employment trends. I expect second-quarter earnings reports will show flat to declining profits due to higher production costs.”
• “Reasonable price-earnings (P/E) ratios, economy coming back from the pandemic, summer season, people want to get out and travel. I believe inflation will moderate.”

This week’s AAII Sentiment Survey results:

• Bullish: 24.7%, down 7.2 percentage points
• Neutral: 33.9%, down 6.7 percentage points
• Bearish: 41.4%, up 13.8 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.