Despite the Headlines, Mr. Market Is Quite Content

• You Can Judge a Fund by Its Volatility – Though conditions are calm now, actively managed funds with previously high levels of volatility will likely return to being volatile once market conditions change.
  
• Data Mixed on Whether Volatility Is Rising – When volatility is looked at on a monthly—instead of on a daily—basis, there is no clear evidence that it has risen over the past 80 years.
  

Optimism among individual investors about the short-term direction of the stock market reached a 15-month high in the latest AAII Sentiment Survey. Meanwhile, both neutral and bearish sentiment declined.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 3.8 percentage points to 45.6%. Optimism was last higher on October 3, 2018 (45.7%). The historical average is 38.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 1.0 percentage points to 29.6%. This is the first time in a year that neutral sentiment is below its historical average of 31.5% on back-to-back weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 2.7 percentage points to 24.8%. The drop keeps pessimism below its historical average of 30.5% for the 14th consecutive week.

All three indicators are currently well within their typical historical ranges.

Optimism is above its historical average for the fourth time in six weeks. Whether this is a shift in trend remains to be seen. Bullish sentiment has not stayed above its historical average for a period of longer than two consecutive weeks since September 2018. It has not had a streak of above-average readings lasting more than three consecutive weeks since January 2018.

The market’s upward trend combined with low volatility and the phase-one trade deal between the U.S. and China are contributing to the higher level of individual investor optimism. Also influencing expectations about the direction of stock prices are the November elections, Washington politics, earnings growth, monetary policy, the economy and valuations.

For this week’s special question, we asked AAII members how they think the trade agreement between the U.S. and China will impact stock prices going forward. While results of the survey show that a majority (70%) believe the trade agreement will have a positive impact, most of these respondents state that the positive impact will be short-lived unless further progress is made. On the other hand, 26% of all respondents believe that the trade agreement will not have a material impact on stock prices.

Here is a sampling of the responses: 

• “Long-term, stock prices will be up. Agriculture purchases and increased production to other industries will be a major contributor going forward.”
• “No immediate impact. I believe the impact of the trade agreement is already priced into the market. There will possibly be a negative impact going forward if China doesn’t hold up their end of the agreement.”
• “It will have a moderate impact but will only be sustained by further progress. Ultimately the market will be disappointed if progress does not continue.”
• “I have no idea. What China actually does is (or should be) more important than what is written in an agreement when determining what one is willing to pay for a specific company’s stock.”