AAII Sentiment Survey: Optimism Jumps to a New 2021 High

Optimism among individual investors about the short-term direction of the stock market is at its highest level of the year. The latest AAII Sentiment Survey also shows an unusually low level of pessimism for the first time since 2019.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 2.0 points to 50.9%. Bullish sentiment was last higher on November 11, 2020 (55.8%). Optimism is above its historical average of 38.0% for the 17th week out of the past 19 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 1.0 percentage points to 28.5%. Neutral sentiment remains below its historical average of 31.5% for the 58th time out of the past 62 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 3.0 percentage points to 20.6%. Bearish sentiment was last lower on December 18, 2019 (20.5%). Bearish sentiment is below its historical average of 30.5% for the seventh time this year.

Bullish sentiment remains at an unusually high level (more than one standard deviation above its historical average). The breakpoint between typical and unusually high readings is 48.0%. Historically, unusually high levels of bullish sentiment have been followed by lower-than-average six- and 12-month returns for the S&P 500 index.

At its current level, pessimism is unusually low. Historically, the S&P 500 has gone on to realize below-average, though still positive, returns over the six- and 12-month periods following such readings.

The ongoing coronavirus pandemic, including the distribution of vaccines, continues to have a big influence on individual investors’ outlook for the stock market. Other factors include the new administration’s policies, economic trends, the current level of valuations and economic stimulus.

For this week’s special question, we asked AAII members to share their thoughts about the Federal Reserve’s willingness to let inflation run moderately above 2% for a period of time without raising interest rates.

More than one-third of respondents (36%) say that they think this is a good decision for the Federal Reserve because it will allow the U.S. to get back to pre-pandemic levels. An additional 12% say that they think it is a good decision as long as interest rates are not kept low for too long.

In comparison, 23% of respondents see current monetary policy as potentially dangerous and are worried about the long-term impact. About 14% of respondents say that they think the Fed is overly optimistic in thinking that it can control the level of inflation.

Here is a sampling of the responses:

• “The Fed’s decision is good. The country and the markets truly need to get back to ‘normalcy’ where retirees, savers, pension funds, insurers, etc., can rely on longer-term fixed-income investments.”
• “Outstanding position. Stability is extremely important. Having a definite plan of action lets everyone recover make positive plans. This can only be positive for the stock market.”
• “They are in a no-win situation. You can’t run huge deficits indefinitely, as it must be paid back. If not, inflation or bankruptcy are your only options.”
• “I am appalled at this plan. This ‘moderately’ high inflation rate significantly devalues asset values over time.”
• “In my opinion, the printing of endless dollars can lead the economy into high inflation and more debt. Rome is burning and no one can put out the financial fire.”
• “I worry that the Fed, that thinks it can control inflation, is naive. Allowing inflation to increase a bit aggressively is inviting it to get out of hand quickly. It is an ‘easy to see’ consequence.”
• “I think it is good as long as the interest rate is not allowed to stay for too long.”

See more Sentiment Survey results.