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Optimism among individual investors about the short-term direction of the stock market is at its highest level in six months. The latest AAII Sentiment Survey also shows the percentage of investors describing their outlook as “bearish” being at a four-month low.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 8.5 percentage points to 34.7%. Optimism was last higher on April 15, 2020 (34.9%). Even with this week’s large increase, bullish sentiment remains below its historical average of 38.0% for the 31st consecutive week and the 36th week this year.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 4.4 percentage points to 26.3%. This is the 37th time out of the past 39 weeks that neutral sentiment is below its historical average of 31.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased by 4.1 percentage points to 39.0%. Pessimism was last lower on June 10, 2020 (38.1%). Nonetheless, bearish sentiment is above its historical average of 30.5% for the 33rd consecutive week and the 35th time this year.

This week’s upward move puts bullish sentiment back within its typical historical range. The pullback in bearish sentiment also put it back within its typical historical range (a reading below 40.2%) for the first time in six weeks.

The improvement in optimism is occurring as major indexes continue to rebound from September lows. As noted above, optimism continues to be below average while pessimism continues to be above average. This differential reflects ongoing concerns about the coronavirus pandemic, the economy and the upcoming election. Other factors influencing AAII members’ sentiment include valuations and interest rates.

For this week’s special question, we asked AAII members their thoughts about September’s pullback in stock prices.

Nearly one-third of respondents (32%) say that September’s pullback in stock prices was anticipated and a needed correction in the new bull market. This compares to 24% of respondents who say that the pullback in stock prices was partly due to the uncertainty surrounding the presidential election. In addition, 20% of respondents say that September’s pullback in stock prices was just the beginning and stock prices will continue to fall through the end of the year. About 16% of respondents say that September’s pullback in stock prices was driven by uncertainties surrounding the pandemic and the rise in coronavirus cases.

Here is a sampling of the responses:

• “It came as no surprise after the huge increase in stock prices since late March. I feel the market got ahead of reality and believe that is still the case.”
• “ The full impact of the pandemic shutdowns will be coming to light through the end of the year as government support expires or is cut back.”
• “The lack of fiscal stimulus and worsening coronavirus cases are primarily responsible for the market drop. The disconnect between Wall Street and Main Street continues to boggle my mind. I expect considerable volatility through February 2021 mainly by election news.”
• “September’s pullback was partly taking profits and partly due to the uncertainty surrounding presidential election. Coronavirus numbers going up also played a part. All said, September was a crazy month with stock valuations at nosebleed levels. The first presidential debate is a window into the chaos that is in front of us. We will see actions that are unprecedented in the history of this country. Stocks will fall a lot further.”

According to the latest AAII Asset Allocation Survey, individual investors’ exposure to fixed-income assets reverted to back the 15-month low recorded in July. Equity exposure declined as well, while cash allocations rose.

Stock and stock fund allocations decreased by 1.2 percentage points to 63.6%. This marks the fourth consecutive month and the sixth month since the start of 2020 that stock and stock fund allocations are above their historical average of 61.0%.

Bond and bond fund allocations declined 1.0 percentage points to 17.9%. This is the 19th consecutive month and the 20th month since the start of 2019 that fixed-income exposure is above its historical average of 16.0%.

Cash allocations saw an increase of 2.2 percentage points to 18.5%. The last time cash allocations were at their historical average of 23.0% was in April 2020 (23.0%).

Equity allocations have stayed within a 2.6-percentage-point range over the past four months (62.2% to 64.8%). Over the same period, fixed-income allocations have fluctuated within a one-percentage-point range (17.9% to 18.9%).

Sentiment about the short-term direction of the stock market worsened with bullish sentiment being unusually low for much of September. At the same time, low interest rates continued to be a challenge for AAII members, many of whom are retired.

September AAII Asset Allocation results:

• Stocks and stock funds: 63.6%, down 1.2 percentage points
• Bonds and bond funds: 17.9%, down 1.0 percentage points
• Cash: 18.5%, up 2.2 percentage points

September AAII Asset Allocation details:

• Stocks: 30.3%, down 1.8 percentage points
• Stock funds: 33.3%, down 3.1 percentage points
• Bonds: 3.5, up 0.5 percentage points
• Bond funds: 14.5%, down 1.4 percentage points

Historical Averages:

• Stocks and stock funds: 61.0%
• Bonds and bond funds: 16.0%
• Cash: 23.0%

The numbers are rounded and may not add up to 100%.

The AAII Asset Allocation Survey has been conducted monthly since November 1987 and asks AAII members what percentage of their portfolios are allocated to stocks, stock funds, bonds, bond funds and cash. The survey and its results are available online at: www.aaii.com/investor-surveys.

• Stocks and Stock Funds: 63.6%, down 1.3 percentage points
• Bonds and Bond Funds: 17.9%, down 1.0 percentage points
• Cash: 18.5%, up 2.2 percentage points

• Stocks: 30.3%, up 1.8 percentage points
• Stocks Funds: 33.3%, down 3.1 percentage points
• Bonds: 3.5%, up 0.5 percentage points
• Bond Funds: 14.5%, down 1.4 percentage points

• Stocks/Stock Funds: 61.5%
• Bonds/Bond Funds: 16.0%
• Cash: 22.5%

Take the Asset Allocation Survey.

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