Too Much Confidence Is Bad for Your Portfolio

• Trading More Frequently Leads to Worse Returns – One of the most cited studies about the adverse impact of making more transactions was conducted by Terrance Odean and Brad Barber. Terry discussed their findings in this November 2014 AAII Journal article.
  
• Think Twice, Even Thrice, Before Trading – A separate analysis by Mark Hulbert found that returns for many newsletters would have been higher if they had issued fewer buy and sell alerts.
  

The percentage of individual investors describing their short-term outlook for stocks as neutral rose to a two-month high as pessimism plunged in the latest AAII Sentiment Survey. Optimism, though still low, rebounded to a four-week high.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 4.8 percentage points to 28.8%. This is the 48th consecutive week and the 81st out of the past 83 weeks with a bullish sentiment reading below its historical average of 38.5%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, jumped 4.4 percentage points to 43.3%. Neutral sentiment was last higher on August 3, 2016 (43.4%). The rise keeps neutral sentiment above its historical average of 31.0% for the 36th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, plunged 9.2 percentage points to 27.9%. The drop puts pessimism at a seven-week low. The drop also puts pessimism below its historical average of 30.5% for the first time in four weeks.

This week’s drop in pessimism is the largest weekly decrease since February 10, 2016, when bearish sentiment fell 10.9 percentage points. We have also seen big weekly increases this year, with pessimism rising by 14.0 percentage points on February 10, by 9.7 percentage points on June 15 and by 7.4 percentage points on September 14. The median weekly change (in either direction) for bearish, and bullish, sentiment over the life of the survey is about 5.0 percentage points.

The pullback in bearish sentiment occurred after pessimism hit 38.3% two weeks ago. A settling down of market volatility appears to have helped calmed the nerves of anxious investors. Nonetheless, some investors still have concerns about the possibility of the stock market experiencing a larger drop than what occurred in mid-September. Further adding to pessimism about the short-term direction of stock prices are concerns about valuations, global economic uncertainty and the pace of corporate earnings growth. Giving other individual investors reason for optimism are this summer’s rise in stock prices, the perceived lack of investment alternatives, corporate earnings, low/stable energy prices and sustained, albeit slow, economic growth.

This week’s special question asked AAII members how much influence the election is having on their expectations for the stock market relative to other factors such as earnings growth, the economy, the Fed, valuations, international factors, etc. Just under half of all respondents (49%) said that the election is either having just a small/minimal impact or no impact on their stock market expectations. Several said that other factors matter more. Nearly a quarter of all respondents (23%), however, said that the election is having a large influence. Many of these investors are bracing for a drop in stock prices, or at least increased volatility. An additional 5% say that the election is creating uncertainty and 4% said that the election is having some influence on their market outlook. We included the phrase “regardless of which candidate you support” in the actual question and most respondents did not state which candidate they favor.

Here is a sampling of the responses:

• “I believe the presidential election has less of an impact than the other factors you mention, earnings growth, the Fed, international factors, etc.”
• “Like the market, I’m not making a move until I feel comfortable with who the new president might be.”
• “I think the election will only have a short-term effect, if any.”
• “My expectations for the aforementioned factors will change with which party is in control.”
• “The election is creating uncertainty, which I view as a negative for the market.”
• “The election, a real disappointment to Americans, will likely trigger a downward slide to stocks.”