The Barbell Strategy—A Simple Way of Being Both Aggressive and Conservative

• The Level3 Withdrawal Strategy to Maximize Your Long-Term Wealth – Jim Cloonan explained his conservative/aggressive Level3 approach to funding withdrawals in this 2017 AAII Journal article.
  
• Strategies to Counteract the Current Market Madness – Given the dual events of the coronavirus and Saudi Arabia cutting oil prices, we posted a video with suggestions on how individual investors can react. 
  

The percentage of individual investors expecting stocks to fall over the short term is at its highest level in seven years. The latest AAII Sentiment Survey also shows a steep drop in optimism and a continued decline in neutral sentiment.

Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 9.0 percentage points to 29.7%. The drop more than reversed last week’s gain and put optimism at its lowest level since October 9, 2019 (20.3%). The historical average is 38.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell by 2.7 percentage points to 19.0%. Neutral sentiment was last lower on December 26, 2018 (18.2%). This week’s drop keeps neutral sentiment below its historical average of 31.5% for the eighth time in nine weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, soared 11.7 percentage points to 51.3%. Pessimism was last higher on April 11, 2013 (54.5%). The large increase keeps bearish sentiment above its historical average of 30.5% for the fifth time in seven weeks.

Pessimism is now at an unusually high level (more than one standard deviation above the historical average). Historically, this has had a weaker association with above-average returns for the S&P 500 index over the following six- and 12-month periods than unusually low levels of optimism. (Bullish sentiment remains within its typical historical range.)

Neutral sentiment is at an unusually low level (more than one standard deviation below the historical average). Historically, such readings have been followed by below-average and below-median returns for the S&P 500 over the following six- and 12-month periods. This historical evidence is influenced by low readings recorded during the early 1990s recession, the dot-com bubble burst and the financial crisis.

The big jump in pessimism is a reflection of the downside volatility we’ve seen in the market, the COVID-19 (coronavirus) pandemic and the oil price cut announced by Saudi Arabia. As we noted last week, many—but not all—individual investors are using the downturn to look for buying opportunities among stocks. Other factors influencing individual investors’ sentiment include the November elections, corporate earnings, economic growth and valuations.

In this week’s special question, we asked AAII members what they thought about the Federal Reserve’s decision to cut interest rates by 50 basis points (0.50%). Of the responses we received, 50% state that the Fed’s decision to cut interest rates was a mistake. Rationale from this group includes lack of “future Fed ammunition” if and when the market deteriorates further, as well as rate cuts being ineffective against ongoing macro events (aka, COVID-19). Alternatively, 27% of respondents state that they support the Fed’s decision to cut rates. Many within this group believe that it was the only viable option that the Fed had to combat the recent market volatility. Finally, 17% of respondents state that the rate cut will have little effect on the market and 6% of respondents state that they are unsure if the Fed made the right decision. Among these respondents, reasoning includes that the rate cut was initiated too late in response to the COVID-19 outbreaks.

Here is a sampling of the responses: 

• “Not the best idea. Indicated to investors their concern about a recession. Now they have little leverage to help.”
• “Although it was the right thing to do, it will make little difference to the economy in the near term.”
• “I believe it was premature and indicated lack of faith in the underlying strength of the economy. As such, it was a bearish signal and likely contributed to the debacle that occurred on March 9.”
• “I haven’t given it much thought yet. I can understand the reasoning behind it, but with the market being volatile and unpredictable, the expected results don’t always go as planned.”