AAII Investor Update: A Tough Year for Stocks

Thursday, December 22, 2011
Charles Rotblut, CFA
AAII Journal Editor

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 33.7%, down 6.5 points
  Neutral: 38.0%, up 11.9 points
  Bearish: 28.2%, down 5.4 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »


This year was supposed to be better. Among the four years of the presidential term, the third has historically been the best-performing one for stocks. Yet, the total return for the S&P 500, which includes dividends, is barely positive. A small rise in prices between now and December would qualify as a win for the presidential cycle in the history books, but it wouldn’t be much consolation for investors.

A big reason why U.S. stocks have veered away from their historical pattern is Congress. Incumbent presidents use the third year of their term to push through economic stimulus in hopes of getting the electorate on their side. This year, as you know, stimulus took a backseat to fiscal austerity and political theater. Even passing the extension to the payroll tax holiday has morphed into a game of political brinksmanship (though, as of today’s market close, a compromise appears to have been reached).

There are many other factors at play. These include, but are not limited to, slow domestic economic growth, Europe’s sovereign debt problems and a potential deceleration in China’s economy. The Japanese earthquake and resulting tsunami also had a global impact.

The net result has been a rough year for investors. Stocks globally have struggled, with results worse outside of U.S. borders than inside them. Year-to-date total returns for exchange-traded funds (ETFs) designed to track major stock indexes, and other asset classes, are shown in the table below.

ETF

Ticker

YTD Return

SPDR S&P 500

SPY

0.80%

iShares Russell 2000

IWM

-4.35%

iShares Russell Microcap

IWC

-9.20%

iShares MSCI EAFE

EFA

-13.90%

iShares MSCI Emerging Markets

EEM

-19.12%

iShares Dow Jones US Real Estate

IYR

4.33%

iShares Barclays 7-10 Year Treasury

IEF

14.73%

SPDR Gold Shares

GLD

13.58%

Year-to-date total returns through 12/21/11. Source: Morningstar


Notice the positive returns for the three ETFs at the bottom of the table. Including asset classes beyond stocks in your portfolio would have helped cushion the blow of this year’s turbulence. And that is why I routinely emphasize diversification—it reduces the overall risk of your portfolio.

In a perfect world, I would make this commentary about the ETFs you should own for 2012. Unfortunately, my—and everybody else’s—crystal ball is cracked. I’m hopeful next year will be better for stocks, but in case it isn’t, I’m also holding other assets in my personal portfolio.

If you wanted to build a diversified portfolio, the ETFs listed above are not a bad place to start, though there may be alternatives with lower expense ratios or more attractive holdings. If you are worried about the direction of interest rates, an alternative to iShares Barclays 7-10 Year Treasury (IEF) would be the SPDR Barclays Capital Intermediate Term Corporate Bond ETF (ITR), or something similar to it. Gold is very difficult to value, making SPDR Gold Shares (GLD) an optional diversification play, as opposed to a primary choice for asset allocation. You may also want to look at our Model ETF Portfolio for ideas, since it is actively managed and uses different funds than those listed above.

More on AAII

The Week Ahead

The U.S. financial markets will be closed on Monday in observance of Christmas.

No S&P 500 member companies will report earnings next week.

The week’s first economic report will be the Conference Board’s December consumer confidence survey, which will be published on Tuesday. November pending home sales will be published on Thursday. The December Chicago PMI will be published on Friday.

No Federal Reserve officials are currently scheduled to speak.

AAII Sentiment Survey

Neutral sentiment rose to its highest level since 2005 in the latest AAII Sentiment Survey, as both bullish and bearish sentiment fell.

Bullish sentiment, expectations that stock prices will rise over the next six months, dropped 6.5 percentage points to 33.7%. This is a four-week low. It is also the fifth time in the past six weeks that bullish sentiment has been below its historical average of 39%.

Neutral sentiment, expectations that stock prices will remain essentially unchanged over the next six months, jumped 11.9 percentage points to 38.0%. This is the highest neutral sentiment has been since April 14, 2005. It is also just the second time in the past 22 weeks that neutral sentiment has been above its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 5.4 percentage points to 28.2%. This is the first time in six weeks that bearish sentiment has been below its historical average of 30%.

Though this week’s neutral sentiment reading is unusually high by recent standards, it remains within its long-term historical range. Neutral sentiment exceeded 40% at least once every year between 1989 and 2005. It has only been over the past six years that the percentage of individual investors expecting a flat market has stayed at lower levels.

Many individual investors remain cautious, and/or frustrated, due to ongoing market volatility and headline risk. European sovereign debt problems, Washington politics and slow economic growth are all weighing on sentiment.

This week’s special question asked AAII members how they thought the S&P 500 will perform in 2012. Respondents expecting an up year outnumbered those expecting a down year by a margin of three to one. Expectations were modest, however, with more of than half of those predicting gains saying the S&P 500 will rise by 10% or less. (Many projected a full-year increase of 5% to 10%.) A notable number of AAII members predicted a rise between 12% and 15% or a drop of 5%. A continuation of volatility was a common theme, even among those who were looking for the stocks to ultimately rise over the course of 2012.

» Take the sentiment survey



Wishing you a Merry Christmas and a Happy Hanukkah,

Charles Rotblut, CFA
AAII Journal Editor