September Added to an Already Volatile Year

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The results from the latest AAII Sentiment Survey show optimism rebounding but continuing to stay unusually low. Pessimism fell after moving above 60% on consecutive weeks but continues to be unusually high.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 4.0 percentage points to 23.9%. Optimism is below its historical average of 38.0% for the 46th consecutive week. It is also unusually low for the sixth consecutive week and the 29th time in 40 weeks. The breakpoint between typical and unusually low readings is currently 27.6%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 2.1 percentage points to 21.3%. Neutral sentiment is below its historical average of 31.5% for the 22nd time in 24 weeks. It is also at an unusually low level for the third consecutive week. The breakpoint between typical and unusually low readings is 23.1%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 6.1 percentage points to 54.8%. Pessimism is above its historical average of 30.5% for the 45th time out of the past 46 weeks and is at an unusually high level for the 30th time out of the last 38 weeks. The breakpoint between typical and unusually high readings is currently 40.6%.

The bull-bear spread (bullish minus bearish sentiment) is –30.8% and is unusually low for the 31st time in 37 weeks. This week’s reading ranks among the most negative in the survey’s history. The breakpoint between typical and unusually low readings is currently –11.0%.

Historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment and the bull-bear spread. Unusually high bearish sentiment readings historically have also been followed by above-average and above-median six-month returns in the S&P 500. The S&P 500 has underperformed following periods of below-average neutral sentiment, though the link is weaker.

Continued volatility in the major stock indexes along with inflation, corporate earnings and increased chatter about the possibility of a recession are all likely weighing on individual investors’ short-term expectations for the stock market. Also influencing sentiment are monetary policy, politics and the ongoing invasion of Ukraine by Russia.

Despite downside volatility and unusually low levels of optimism, the September AAII Asset Allocation Survey only shows a modest decrease in individual investors’ allocation to equities.

Stock and stock fund allocations declined by 1.1 percentage points to 63.4%. Though at a two-year low, equity exposure remains above the historical average of 61.5% for the 28th consecutive month. Allocations to stocks and stock funds were last lower in November 2020 (63.2%).

Bond and bond fund allocations increased by 0.3 percentage points to 14.7%. This is the fourth time in five months that fixed-income allocations have increased. Nonetheless, bond and bond fund allocations are below their historical average of 16.0% for the 19th consecutive month. 

Cash allocations rebounded by 0.7 percentage points to 21.9%. September was the 29th consecutive month that cash allocations have been below their historical average of 22.5%. 

There were three weeks during September with bullish sentiment readings ranking among the 50 lowest in our Sentiment Survey’s history. At the same time, bond yields continued to rise—albeit with some increased volatility near September’s end. Yet, AAII members largely stuck to their allocations. This is because they follow a long-term approach to investing, as we encourage them to do so.

• Stocks and Stock Funds: 63.4%, down 1.1 percentage points
• Bonds and Bond Funds: 14.7%, up 0.4 percentage points
• Cash: 21.9%, up 0.7 percentage points

• Stocks: 29.9%, down 0.5 percentage points
• Stocks Funds: 33.5%, down 0.6 percentage points
• Bonds: 3.4%, up 0.4 percentage points
• Bond Funds: 11.4%, up 0.0 percentage points

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

Take the Asset Allocation Survey.

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