AAII Investor Update: Investors Optimistic, But Problems Remain

Thursday, January 19, 2012
Charles Rotblut, CFA
AAII Journal Editor

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 47.2%, down 1.9 points
  Neutral: 29.2%, down 4.5 points
  Bearish: 23.6%, up 6.4 points

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

Take the AAII Sentiment Survey »

Investor optimism is improving, according to various indicators. Bullish sentiment is slightly below 50% for the third consecutive week in our Sentiment Survey and is at 50% in the Investor’s Intelligence advisor survey. Yesterday, the Investment Company Institute (ICI) said domestic stock funds experienced their first week of net inflows since last August. Even Mark Hulbert’s Stock Newsletter Sentiment Index (HSNSI) is showing that market timers expect stock prices to rise.

As you know, stocks have started the year off on the right foot. In fact, the S&P 500 is enjoying its best early January performance since 1987, according to Bloomberg. The index is also extending a 17% rebound that started in early October. The advance has pushed the S&P 500 above its 200-day moving average, a positive chart pattern.

The U.S. economy is giving investors reasons to be hopeful. Both the ISM manufacturing and non-manufacturing indexes improved from November to December. December nonfarm payrolls surprised to the upside. This morning, the Labor Department reported the lowest number of initial jobless claims since April 2008. Though nobody would describe economic growth as robust, the data is good enough to diminish short-term worries of a forthcoming recession.

Dark clouds are still present in the sky, however. The World Bank cut its forecast for global economic growth yesterday: 1.4% expansion for developed countries and 5.4% expansion for developing countries. Europe has yet to solve its sovereign debt crisis. (The World Bank anticipates Europe will fall into a recession with a 0.3% contraction.) China’s economy is slowing; we just don’t know exactly at what pace. Unemployment in the U.S. remains high, and many of the jobs created last month were low-paying gigs. Fourth-quarter earnings season has stumbled out of the gate. S&P Capital IQ says the earnings beat rate of 49% is the lowest it has been in 10 years. (As of this morning, 29 companies topped expectations, 19 missed and 10 matched.)

This mix of good and bad news explains why advisors who are hopeful aren’t exuberant. In a Barron’s roundtable of market strategists, Scott Black of Delphi Management was called optimistic for predicting stock prices to rise 6% to 7% this year. Many bulls expect more volatility (as do many bears). In other words, this is shaping up to be a year when market forecasts come with a footnote that reads “fingers crossed.”

Looking beyond 2012 raises more questions. In the U.S., numerous tax breaks will expire at the end of this year if Congress does not act. Worldwide, several countries could have new leaders, or vote to keep their current leadership. Then there are central bank policies, many of which are risking long-term inflation in an effort to boost short-term demand.

Given this backdrop, it makes sense not to blindly follow the crowd—in either direction. Chasing upward momentum could create losses if negative headlines start to influence the market again. Avoiding equities during market pullbacks could cause you to miss out when stock prices go on sale. Rather than reacting to short-term shifts in sentiment, diversify your portfolio, rebalance as necessary and think long-term. This is your best defense against the current uncertainty.

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Model Portfolios Updated on AAII.com

There are no new transactions to announce.

The Model Shadow Stock Portfolio performed very well in December, gaining 4.8%. The Model Shadow Stock Portfolio beat both the Vanguard Small Cap fund (NAESX), which gained 0.2%, and the DFA US Micro Cap fund (DFSCX), which gained 0.9%. For the year, the Shadow Stock Portfolio is up 6.3%, while the Vanguard Small Cap fund is down 2.8% and the DFA US Micro Cap fund is down 3.3%.

The Model Mutual Fund Portfolio gained 0.9% for the month. This compares to the Vanguard Total Stock Market fund (VTSMX), which gained 0.8%. For the year, the Model Mutual Fund Portfolio declined 1.7%, while the Vanguard Total Stock Market fund rose 1.0%.

The Model ETF Portfolio gained 1.4%, outperforming the 80% SPDR S&P 500 ETF (SPY) and 20% iShares MSCI EAFE Index ETF (EFA) benchmark, which gained 0.6%. For all of 2011, the Model ETF Portfolio declined 3.7%, while its benchmark fell 0.9%.

The Week Ahead

More than 100 S&P 500 member companies are scheduled to report earnings results. Among them will be many Dow components: Du Pont (DD), Johnson & Johnson (JNJ), McDonald’s (MCD), The Travelers Companies (TRV) and Verizon (VZ) on Tuesday; Boeing (BA) and United Technologies (UTX) on Wednesday; 3M (MMM), AT&T (T) and Caterpillar (CAT) on Thursday; and Chevron (CVX) and Proctor & Gamble (PG) on Friday.

The Federal Open Market Committee (FOMC) will hold a two-day meeting, starting on Tuesday. The meeting statement will published around 12:30 p.m. ET on Wednesday, followed by a 2:15 p.m. press conference with Federal Reserve Chairman Ben Bernanke.

The week’s first economic report of note will be the National Association of Realtors’ November pending home sales index, which will be published on Wednesday. Thursday will feature December durable goods orders, December new home sales and the December Leading Indicators index. The first estimate of fourth-quarter GDP growth and the final January University of Michigan consumer sentiment survey will be published on Friday.

The Treasury Department will auction $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday.

AAII Sentiment Survey

Bullish sentiment is above average for the fourth consecutive week, while bearish sentiment rebounded in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, declined 1.9 percentage points to 47.2%. Even with the drop, bullish sentiment is above its historical average of 39% for the fourth consecutive week and the 10th time out of the last 15 weeks.

Neutral sentiment, expectations that stock prices will remain essentially flat over the next six months, fell 4.5 percentage points to 29.2%. This is the first time in three weeks that neutral sentiment is below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 6.4 percentage points to 23.6%. Although this is a three-week high, pessimism is below its historical average of 30% for the fourth time in the past five weeks.

Sentiment remains upbeat, as individual investors are hopeful about the short-term direction of prices. Even though many are optimistic, individual investors still remain concerned about the pace of economic growth, Washington politics and the European sovereign debt crisis.

This week's special question asked AAII members if they are taking on more risk (investing more aggressively), less risk (investing more conservatively) or keeping their risk exposure about the same as six months ago. The largest number of respondents said they were keeping their risk exposure unchanged. Investing more conservatively and investing more aggressively ranked second and third in terms of the number of responses.

Here is a sampling of the responses:

  • “About the same. I try to keep a balanced portfolio with stocks, stock funds and bonds.”
  • “No change. I see a lot of positives, but I still feel something big and negative will happen to counteract the positives.”
  • “Same, but I'm more relaxed. The market seems to have baked in the European and Congressional stalemates. It is not as skittish as it was from August forward in 2011.”
  • “Less risk. The market is just too erratic and scary at this time.”
  • “I am investing with a little more risk, as I feel that we will experience a slow but improving world economy.”

» Take the sentiment survey

Wishing you prosperity,

Charles Rotblut, CFA
AAII Journal Editor