Optimism Among Individual Investors Bounced Back Last Year

Optimism among individual investors in our weekly AAII Sentiment Survey bounced back in 2023. The improvement came in June 2023 as bullish sentiment ended what had been a nearly perfect 18-month streak of below-average optimism.

Though AAII members felt generally more upbeat about the short-term outlook for stocks during the second half of 2023—and so far into this year—last year still ranked below average overall. The average bullish sentiment reading in 2023 was 34.7%. This is the 26th-lowest annual average in the survey’s 37-year history.

You wouldn’t be able to tell this from our Asset Allocation Survey. Equity allocations among surveyed AAII members averaged 65.6% in 2023. This ranks as the 13th-highest average exposure to stocks and stock funds over the past 37 years.

The differences between the two surveys tie back to a point I regularly reiterate: Individual investors’ short-term expectations for how the stock market will perform rarely go hand in hand with their portfolio allocations. Even with the end of the bear market and the subsequent rebounds in stock prices and optimism, average annual equity allocations were nearly unchanged between 2022 and 2023.

What last year did was give us more data on how the S&P 500 index performs following unusually low readings for bullish sentiment and unusually high readings for bearish sentiment. A reading is categorized as unusual if it is more than one standard deviation above or below its historical average. The averages have been updated for each of the survey’s approximate 1,900 weeks to avoid any hindsight bias in the calculations.

The average six-month gain in the S&P 500 following unusually low bullish sentiment readings in the AAII Sentiment Survey is 6.7%. The median is 6.9%. Both are slightly higher than they were at the end of 2022 (increases of 0.1 and 0.2 percentage points, respectively). Due to last year’s bear market, 30 additional six-month periods were added. This brought the total count of six-month periods used in the calculation to 264.

The S&P 500’s six-month return following unusual bull-bear spreads—the difference between bullish and bearish sentiment—also slightly improved. The average six-month return increased by 0.1 percentage points to 5.8%. The median gain increased by 0.3 percentage points to 6.9%.

To put these numbers in context, the S&P 500 averaged a 4.6% gain over all six-month periods between June 1987 and December 2023. The median gain for the large-cap index was 5.4%.

Returns following unusually high bearish sentiment readings also slightly improved. The average return for the S&P 500 following unusually high pessimism is 5.4%. The median return is 6.2%. These numbers reflect small increases of 0.1 and 0.2 percentage points, respectively.

Last year, sentiment improved not only among individual investors but also among financial newsletter writers and fund managers. Slowing inflation and strong gains realized by the S&P 500 were both contributors.

Sentiment indicators are most useful as a prompt to look at the broader market. When bullish sentiment and/or the bull-bear spread are unusually low, ask what is occurring that would give investors reason to feel cautious. Similarly, when optimism is unusually high, ask what may be causing investors to be bullish.

The answers may reveal whether it makes sense to check your allocation to see if it is still approximately in line with your goals, if any presently held investments are meeting your sell rules or if there are opportunities that others may be overlooking. Most importantly, remember that successful investing requires both long-term focus and the ability to not react to short-term emotions.