Before you give into any temptation to follow analysts’ recommendations, consider this conclusion from three researchers: “On average, analysts’ revisions are not highly correlated with subsequent long-run returns, indicating that analysts do not provide new information that is relevant for the long run for typical investors.” The finding is from an appropriately named paper published in the Journal of Financial Economics, “Can Analysts Pick Stocks for the Long Run?” (A draft version is available on the SSRN website.)

The study finds that there is no aggregate post-revision return drift (PRD). This is an academic way of saying that the impact of an upgrade (e.g., from a buy to a strong buy) or a downgrade (e.g., from a buy to a hold) is not measurable 20, 60 or 120 days later. Yes, there might be an immediate reaction the day change is made, but it isn’t lasting.

This lack of a PRD is a sign that analysts are not supplying new information about which stocks to pick or avoid. In other words, you cannot hope to profit by buying a stock that has been upgraded by analysts or avoid a loss by selling a stock that has been downgraded. An exception may exist with small, less frequently traded companies, but even then, the data is murky.

To every rule, there are exceptions. It’s a significant challenge to identify a stock that will rise solely because of an upgrade (or fall solely because of a downgrade). A far more likely occurrence is the stock moving in reaction to whatever prompted the change in the analyst’s opinion (e.g., an earnings-related announcement, a change in the stock’s valuation, etc.). In this case, the market is reacting to the same information the analyst is as opposed to the analyst uncovering something unknown to other market participants.

This isn’t to say analyst research is worthless. The actual analyst reports can be useful for gaining information about a company and for identifying flaws in your own analysis. The key is to read the actual report as opposed to paying attention to whether the stock is rated a buy or a hold. (Analysts continue to avoid using the “sell” word as much as possible.)

There is even greater value in the changes (revisions) to earnings estimates. Not in the change made by any single analyst, but in the change of the overall consensus estimate, which is the average of all published analyst estimates. Upward revisions lead to a positive drift, meaning higher long-term returns. Downward revisions lead to a negative drift, meaning lower long-term returns. You can see the effectiveness of earnings estimate revisions in the AAII Stock Screens: Estimate Revisions: Up 5% and Estimate Revisions: Top 30 Up have the best long-term returns of any of the more than 60 stock screens we track, as of the end of last month (March 2016). Near the bottom—ranking third and fourth worst—are our Estimate Revisions: Lowest 30 Down and Estimates Revisions: Down 5% screens.

• AAII Stock Screen Performance History – Year-by-year performance data for our earnings estimate revisions screens, along with performance data for all of the other AAII stocks screens, updated monthly and grouped by category.
  
• Earnings Estimates – I explained in further detail what earnings estimates are and how they can lead to both higher (positive revisions) and lower (negative revisions) stock prices.
  
• A Look at Relative Strength Measures – Should a stock move upward in response to a change in an analysts’ outlook, the move will likely be reflected in its relative strength. AAII president John Bajkowski discusses relative strength in his latest AAII Blog post.
  
• Do You Pay Attention to Analyst Recommendations? – Tell us on the AAII.com Discussion Boards.
  

I will speak to our Philadelphia Chapter on Tuesday.

Friday, April 29, is the deadline for filing and suspending Social Security benefits for the purpose of making your spouse eligible to take spousal benefits. You won’t be able to do so afterward. Information about the rule change can be found in the January AAII Journal.

Nearly 200 members of the S&P 500 will report earnings next week. Included in this large group are Dow Jones industrial average components: Apple (AAPL) on Monday; 3M (MMM), Du Pont (DD) and Procter & Gamble (PG) on Tuesday; Boeing Co. (BA) and United Technologies (UTX) on Wednesday; and Chevron (CVX) and Exxon Mobil Corp. (XOM) on Friday.

The Federal Open Market Committee will hold a two-day meeting starting on Tuesday. The meeting statement will be released Wednesday at 2:00 p.m. ET. The futures market is pricing in a 97.7% probability of the target rate being unchanged.

Elsewhere on the economic calendar, March new home sales will be released on Monday. Tuesday will feature March durable goods orders, the Conference Board’s April consumer confidence survey and the February Case-Shiller home price index. February international trade and March pending home sales will be released on Wednesday. Thursday will feature the first estimate of first-quarter GDP.  March personal income and spending, the April Chicago PMI and the University of Michigan’s final April consumer sentiment survey will be released on Friday.

It’s not often that a Federal Reserve official makes a public appearance the same week as a FOMC meeting (beyond Chair Janet Yellen’s quarterly press conferences), but Dallas president Rob Kaplan will speak on Friday.

The Treasury Department will auction $26 billion of two-year notes on Monday, $34 billion of five-year notes on Tuesday and both $15 billion of floating two-year notes and $28 billion of traditional seven-year notes on Thursday.

For just the third time in the past 23 weeks, at least one in three individual investors say they are optimistic about the short-term direction of stock prices, according to the latest AAII Sentiment Survey. Meanwhile, neutral sentiment is above 40% for a sixth consecutive week.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded by 5.6 percentage points to 33.4%. This is a five-week high. Even with the rebound, optimism is below its historical average of 39.0% for the 24th consecutive week and the 57th out of the past 59 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 4.6 percentage points to 42.7%. As noted above, this is the sixth consecutive week that neutral sentiment is above 40%—the longest such streak since a 16-week stretch between April 9 and July 15, 2015. This is the also the 12th consecutive week and the 64th out of the past 68 weeks with a neutral sentiment reading above its historical average of 31.0%.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 1.0 percentage points to 23.9%. The decrease keeps pessimism below its historical average of 30.0% for an eighth consecutive week.

Even though the S&P 500 index is trading near its record high and the smaller-cap Russell 2000 index has rebounded as well, many individual investors remain cautious. Optimism has mostly stayed below its historical average over the past 60 weeks. Even this week’s reading was only the third time that bullish sentiment has exceeded 33% since last November. Notably, when the S&P 500 set its last record closing high on May 21, 2015, just 25.2% of surveyed individual investors described their outlook as bullish.

Currently giving individual investors cause for concern is the slow pace of U.S. economic growth and uncertain global economic growth, terrorism and global unrest, lackluster corporate earnings and the prevailing level of valuations. Some AAII members, however, are encouraged by sustained domestic economic growth, expected corporate earnings growth and still-low energy prices.

This week’s special question asked AAII members what their comfort level is with the current valuations of stocks. Slightly more than one out of four respondents (26%) view stock prices as being overvalued. An additional 22% said that they are either uncomfortable with current valuations or that stocks are somewhat overvalued. The lack of adequate earnings to support current prices was the most common reason given as to why, followed by a lack of sufficient earnings growth. Conversely, nearly 14% of respondents said they are comfortable with the current level of valuations. About 8% of respondents said that stocks are fairly valued right now.

Here is a sampling of the responses:

• “Many companies that I follow appear overvalued based on most of the traditional valuation metrics.”
• “A little uncomfortable. Earnings need to catch up.”
• “In general, overvalued with low growth expected to continue.”
• “I expect future profit improvement, which will result in stocks being cheap.”
• “Stocks are probably fairly valued at this point…no overwhelming buys or sells.”

Bullish: 33.4%, up 5.6 points
Neutral: 42.7%, down 4.6 points
Bearish: 23.9%, down 1.0 points


Bullish: 39.0%
Neutral: 31.0%
Bearish: 30.0%

AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!

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