Inflationary Signals Continue to Point Upward

• Over time, dividends have been effective at helping portfolios combat inflation.


• Before reacting to the latest inflation data, consider that selling topped the list of investing mistakes AAII members have made in the latest Big Question survey.


• If you’re looking to play off the reopening of the economy, the May AAII Journal lists 20 leisure stocks with signs of life.


• The deadline for filing 2020 federal taxes and making 2020 contributions to IRAs and related accounts is Monday. If you have not filed yet, our tax guide may be of help.


• Have questions about the AAII model stock portfolios? Tune in to hear my colleague Wayne Thorp compare and contrast them in our latest live webinar.

Bullish sentiment among individual investors about the short-term direction of the stock market fell to its lowest level since October 2020. The latest AAII Sentiment Survey also shows an increase in both bearish and neutral sentiment.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 7.8 percentage points to 36.5%. Bullish sentiment was last lower on October 28, 2020 (35.3%). Optimism is below its historical average of 38.0% for the first time in 14 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 4.0 percentage points to 36.5%. Neutral sentiment was last higher on January 8, 2020 (37.0%). Neutral sentiment remains above its historical average of 31.5% for the third consecutive week and the fourth time this year.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 3.8 percentage points to 27.0%. Pessimism was last higher on February 3, 2021 (35.6%). Even with this week’s increase, bearish sentiment remains below its historical average of 30.5% for the 14th time this year.

At current levels, all three sentiment readings are within their typical historical ranges.

The return to normalcy from the coronavirus pandemic, monetary and fiscal stimulus and inflationary pressures are influencing individual investors’ outlook for stocks. Other factors include earnings, the Biden administration’s initiatives and valuations.

For this week’s special question, we asked AAII members to share their opinions of the current valuation of stocks. Nearly three out of five respondents (59%) say that the current valuation of stocks is too high at this time. Many within this group view valuations as too pricey to be sustainable and will likely lead to a correction. This compares to 15% of respondents who say that they think there is a mixture of overvalued and undervalued stocks in the market.

In addition, about 11% of respondents say that they think that the current valuations reflect a frothy market and pent-up demand. About 10% of respondents say that they think the current valuations are relatively reasonable given the pace of recovery and recent earnings results.

Here is a sampling of the responses:

• “Valuations are generally high compared to historical levels, especially in the technology growth area, but with interest rates generally low and many cyclical stocks in precarious financial conditions due to the pandemic, what are you going to do but pay up?”
• “This has been the best quarter for earnings in a long time. Thus, I don’t feel the market is overvalued. It should be going up as the nation recovers from the coronavirus.”
• “The valuations are a little high but are based on results from a rather unusual past 12 months. The forward-looking valuations seem a bit more reasonable.”
• “The stock market thinks the economy will get back to pre-pandemic numbers in the near future. With President Biden wanting to increase taxes on corporations, the return to pre-pandemic will be very slow.”
• “Depends on the sector. Some, like technology stocks that have done well in the past year, are overvalued. Stocks that are in sectors recovering from the pandemic are much more reasonable.”