AAII Sentiment Survey: Neutral Falls to a Five-Month Low

The percentage of individual investors describing their short-term outlook as “neutral” reached a five-month low in the latest AAII Sentiment Survey. At the same time, optimism is above 50% for the third time in four weeks.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 3.1 percentage points to 53.8%. Optimism is above its historical average of 38.0% for the 20th week out of the past 22 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 1.1 percentage points to 21.6%. Neutral sentiment was last lower on November 11, 2020 (19.3%). Neutral sentiment remains below its historical average of 31.5% for the 61st time out of the past 65 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 4.2 percentage points to 24.6%. Bearish sentiment was last higher on March 3, 2021 (25.3%). Bearish sentiment is below its historical average of 30.5% for the 10th time this year.

At current levels, bullish sentiment is unusually high and neutral sentiment is unusually low. Historically, both above-average readings for bullish sentiment and below-average readings for neutral sentiment have been followed by below-average six- and 12-month returns for the S&P 500 index. Bearish sentiment is back within its typical historical range.

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.

This week’s special question asked AAII members how they would describe the current state of the economy.

More than one-third of respondents (36%) think the economy is showing signs of a strong recovery as more people are being vaccinated and are going back to work. This compares to 25% of respondents who say that the economy is being propelled by stimulus payments and too much monetary stimulus. They fear that the economy will pay the price in the future as a result. Many within this category also express their concerns about the possibility of a market correction resulting from rising interest rates, taxes and government spending.

About 16% of respondents say that they think while the economy is showing signs of recovery, the market is over-extended and too optimistic. Another 16% of respondents say that they think the economy is very fragile. Many are also uncertain and cautious about the market in the future.

Here is a sampling of the responses:

• “The economy is overstimulated, and it appears that stimulation policy will continue for the foreseeable future. Pick your own outcome but be prepared to be surprised.”
• “Overinflated due to low interest rates and proposed massive federal giveaway/pork barrel programs. When the well runs dry, beware of the crash ... and the current level of pie-in-the-sky unrestrained spending is unsustainable.”
• “Recovering, but has a way to go. The market has gotten ahead of itself.”
• “Poised to take off. Spending on restaurants, travel and entertainment is likely to steadily increase until things return to normal, with perhaps some acceleration when we approach herd immunity.”

See more Sentiment Survey results.