Don't Judge an Index Fund by Its Cover

• This past November, AAII president John Bajkowski published a chart demonstrating how higher expense ratios reduce wealth.


• I will explain how to analyze a fund on Wednesday, April 21.


• Since April is Financial Capability Month, we asked FINRA’s Christine Kieffer to offer suggestions on how to get family members interested in investing. More suggestions will be offered on our upcoming April 14 episode of The Individual Investor Show.


• Also as part of Financial Capability Month, AAII Journal contributing editor Craig Israelsen explains how asset allocation impacts retirement income.

Optimism among individual investors about the short-term direction of the stock market jumped to its highest level in more than three years. The latest AAII Sentiment Survey also shows bearish sentiment at its lowest level in two years.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 11.1 percentage points to 56.9%. Bullish sentiment was last higher on January 3, 2018 (59.8%). Optimism is above its historical average of 38.0% for the 19th week out of the past 21 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 8.3 percentage points to 22.7%. Neutral sentiment was last lower on November 11, 2020 (19.3%). Neutral sentiment remains below its historical average of 31.5% for the 60th time out of the past 64 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 2.8 percentage points to 20.4%. Bearish sentiment was last lower on April 24, 2019 (20.2%). Bearish sentiment is below its historical average of 30.5% for the ninth time this year.

The difference between optimism and pessimism is 36.5 percentage points. This is the widest the bull-bear spread has been since January 3, 2018 (44.2 percentage points). At current levels, bullish sentiment is unusually high and both neutral and bearish sentiment are unusually low. Historically, both above-average readings for bullish sentiment and below-average readings for bearish and neutral sentiment have been followed by below-average six- and 12-month returns for the S&P 500 index.

The ongoing coronavirus pandemic, including the distribution of vaccines, continues to have a big influence on individual investors’ outlook for the stock market. Other factors include the new administration’s policies, economic trends, the current level of valuations and economic stimulus.

For this week’s special question, we asked AAII members how the coronavirus pandemic (including the vaccinations as well as the recent rise in cases) is influencing their outlook for stock prices.

Nearly two out of five respondents (39%) say that they expect stock prices to rise as more people are vaccinated and businesses return to normal. This compares to 20% of respondents who say that the pandemic is having little to no impact on their outlook for stock prices.

In addition, about 20% of respondents say that they think the market is overpriced and that they think there is a gap between valuations and fundamentals. Many within this category also state that overly optimistic sentiment in the market could result in a correction toward the end of the year. About 12% of respondents say that they remain bearish and cautious.

Here is a sampling of the responses:

• “Vaccinations have created optimism for the economy, but valuations are still too high, so my outlook for stocks is pessimistic.”
• “Vaccinations are giving people a sense of ease about getting back to their normal recreational outings (dining out, gyms, etc.). However, eventually investors are going to realize how much additional debt and especially risky debt has been added as the additional bankruptcies and bond downgrades start occurring. There are many renters, student debt borrowers and mortgagees who aren’t making payments. Many of these will default. I believe the market is fully priced and this will cause the realization that the future isn’t all rosy and growth.”
• “I think there is a pent-up demand by consumers to get out of the house and start returning back to a normal life. I would expect restaurants, travel and entertainment venues to have a lot of business in the next six months.”
• “I think the stock market will go up in the short term and then correct due to the poor fundamentals.”
• “Concerned that the market may have gotten ahead of itself with too much optimism, particularly since employment levels are still down on an absolute basis. European stocks, by contrast, may reflect too much pessimism since they will eventually get their vaccination programs on track.”

Individual investors’ exposure to equities reached a 37-month high in March according to the latest AAII Asset Allocation Survey. Fixed-income allocations, meanwhile, declined to a 29-month low.

Stock and stock fund allocations increased by 2.3 percentage points to 70.0%, marking the 10th consecutive month that equity allocations are above the historical average of 61.0%. Equity allocations were last higher in February 2018 (70.1%).

Bond and bond fund allocations pulled back by 0.7 percentage points to 15.3%, falling below its historical average of 16.0% for the first time since February 2019 (15.8%). Fixed-income allocations were last lower in October 2018 (13.3%).

Cash allocations decreased 1.5 percentage points to 14.7%, marking a 14-month low and the 11th consecutive month cash allocations have been below their historical average of 23.0%. Allocations in cash were last lower in January 2020 (13.8%).

Individual investors’ exposure to equities reached an unusually high level in March (more than one standard deviation above the historical average). Bullish sentiment was at an unusually high level throughout much of March. At the same time, rising stock prices and falling bond prices shift allocations—even for those investors who made no changes to their portfolios.

• Stocks and Stock Funds: 70.0%, up 2.3 percentage points
• Bonds and Bond Funds: 15.3%, down 0.7 percentage points
• Cash: 14.7%, down 1.5 percentage points

• Stocks: 30.8%, up 1.8 percentage points
• Stocks Funds: 39.2%, up 0.5 percentage points
• Bonds: 2.4%, up 0.3 percentage points
• Bond Funds: 13.0%, down 1.0 percentage points

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

Take the Asset Allocation Survey.

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