AAII sentiment survey: Neutral sentiment jumps to a 2-year high

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In the latest AAII Sentiment Survey, neutral sentiment rose to its highest level in more than two years. In addition, the percentage of individual investors describing their outlook for stocks as “bullish” or “bearish” both decreased.

Bullish sentiment – expectations that stock prices will rise over the next six months – decreased 2.1 percentage points to 24.4%, staying well below the historical average of 38.0%. Bullish sentiment levels are unusually low for the fifth consecutive week and below the historical average for the 12th consecutive week.

Neutral sentiment – expectations that stock prices will remain essentially unchanged over the next six months – rose sharply by 10.3 percentage points to 40.2%. Neutral sentiment was last higher on January 1, 2020 (40.9%). Neutral sentiment is also above its historical average of 31.5% for the eighth time in 10 weeks.

Bearish sentiment – expectations that stock prices will fall over the next six months – decreased by 8.2 percentage points to 35.5%. This is the 12th consecutive week with pessimism above its historical average of 30.5%. However, it is also the third consecutive week that bearish sentiment has incurred a weekly decline of five percentage points or more.

As noted above, bullish sentiment is at an unusually low level for the fifth consecutive week. 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 an unusually low reading for bullish sentiment.

Neutral sentiment is now at an unusually high level. Such readings have previously been followed by slightly below-average and below-median six-month returns, but above-average and above-median 12-month returns for the S&P 500.

Inflation, interest rates, the coronavirus pandemic and politics are all influencing individual investors’ outlook for stocks. Other factors include the economy and corporate earnings. The ongoing volatility in the stock market is likely also playing a role.

For this week’s special question, we asked AAII members to share their thoughts on how the prospect of four interest rate hikes in 2022 is impacting their portfolio allocation decisions.

Nearly two out of five respondents (38%) say that the proposed rate hikes have no impact on their portfolio allocation decisions, as many are already expecting them. Conversely, 25% of respondents say that their stock allocation would be impacted. Some of these respondents say they are shifting more toward growth stocks, while others say they are favoring value stocks. About 13% of respondents say that their bond allocation would be impacted, with many pivoting away from the fixed-income securities.

Around 9% of respondents remain uncertain as to how the rate hikes would impact their portfolios. Roughly 5% of respondents believe that the proposed rate hikes would have a positive impact and 5% foresee a negative impact.

Here is a sampling of the responses:

  • “None. Inflation will be controlled with higher interest rates. Neutral effect on the equity markets. ”
  • “I am rebalancing toward value stocks and large growth stocks.”
  • “Holding off on buying any fixed-income instruments except very short-term (less than one-year) ones.”
  • “It depends on the magnitude of the hike. A small hike, 0.25% per hike (three or four for the year), will not have an impact. Larger hikes may have a dampening effect. ”
  • “The closer we get to actual market rates the better off the country will be. As long as the Federal Reserve does not lose its head and go off the deep end, a gradual increase in rates should help stem inflation in the long run. Short-run pain for long-run gain. ”
  • “Bad for stocks.”

This week’s AAII Sentiment Survey results:

  • Bullish: 24.4%, down 2.1 percentage points
  • Neutral: 40.2%, up 10.3 percentage points
  • Bearish: 35.5%, down 8.2 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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