Euro Weakness Has Been a Drag

• Using Currencies to Diversify Your Portfolio – Axel Merk explains the rationale for having some exposure to international currencies and how to go about doing so.
  
• The Cash Flow Statement: Tracing the Sources and the Uses of Cash – This financial statement can provide insight into how exchange rate fluctuations are impacting a company’s cash flow.
  
• Do You Prefer Companies with Mostly Domestic or Significant International Operations? – Tell us on the AAII.com Discussion Boards.
  

Pessimism among individual investors jumped, while optimism fell to levels not seen in about four months, according to the latest AAII Sentiment Survey. The moves reversed the changes recorded in last week’s survey results.

Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 8.7 percentage points to 35.5%. Optimism was last lower on October 2, 2014 (35.4%). This is the second time in three weeks, but the just fourth time in the past 26 weeks, that optimism is below its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 1.4 percentage points to 32.1%. Even with the decline, neutral sentiment is above its historical average of 30.5% for the fifth consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, reversed last week’s drop and surged by 10.0 percentage points to 32.4%. This is the largest amount of pessimism recorded by our survey since October 16, 2014 (33.7%). It is also the second time in three weeks, but just the fifth time in the past six months, that bearish sentiment is above its historical average of 30.5%.

The 3.1 percentage-point difference between bullish and bearish sentiment is the narrowest spread since July 31, 2014 (0.0). The bull-bear spread was last negative on August 7, 2014 (-7.3), when pessimism exceeded optimism.

A combination of recent price volatility and fourth-quarter earnings reports have contributed to the recent swings in both bullish and bearish sentiment registered by our survey over the past few weeks. Keeping AAII members encouraged is the overall upward momentum of stock prices, falling energy prices, earnings growth and sustained economic expansion. Causing other members to be cautious or pessimistic are disappointing earnings or guidance from certain companies, geopolitical events, the impact of falling oil prices on energy stocks, a sense that prevailing valuations for stocks are too high, the pace of economic growth and worries that an even larger decline in stock prices could occur.

This week’s special question asked AAII members how the stronger dollar is influencing their sentiment toward companies with international operations. More than third of all respondents (36%) said it is having a negative impact. Several of these individual investors said the stronger dollar is creating a headwind for corporate earnings or is causing them to be more selective about which stocks they buy. About 29% said the stronger dollar isn’t having an effect. Some of these respondents said they do not invest in foreign companies or view the currency fluctuations as part of a normal, cyclical trend. Slightly more than 10% of respondents said the stronger dollar is having more of a company-specific than a broad market impact on their sentiment.

Here is a sampling of the responses:

• “It does not affect my thinking. This is just a cyclical change. Soon enough fortunes will be reversed.”
• “Makes me less likely to buy or add to [shares of companies with international operations].”
• “Guarded. Some are okay and some I would avoid.”
• “I try not to invest in international companies.”
• “Companies with international operations are going to take hit to profits. Their share price will go down as a result.”
• “No change. I have a longer-term view.”