AAII Sentiment Survey: Bullish Sentiment Rebounds, Neutral Sentiment Loses Steam

Optimism among individual investors about the short-term direction of the stock market saw a substantial increase, accelerating above its historical average. Meanwhile, the percentage of investors describing their outlook for stocks as neutral fell below its average.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 6.4 percentage points to 39.6%. This is the first time that optimism is above the historical average of 38.0% in the last seven weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell by 4.3 percentage points to 27.5%. This is the first time in eight weeks that neutral sentiment is below its historical average of 31.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined by 2.1 percentage points to 33.0%. This is the fourth consecutive week and the fifth time out of the last 29 weeks that bearish sentiment is above its historical average of 30.5%.

At current levels, all three readings are within their typical historical ranges.

The return to normalcy from the coronavirus pandemic, monetary and fiscal stimulus and inflationary pressures are influencing individual investors’ outlook for stocks. Other factors include earnings, valuations and the Biden administration’s initiatives.

In this week’s special question, we asked AAII members how inflation is impacting their investment decisions. More than half of respondents (54%) say that they have no current worry about inflation, or that they think the effects of inflation will be minimal. Many say that inflation talks are no cause to worry until there are actual indicators of inflation.

Fifteen percent state that they are investing more in stocks, with the thought that the market will continue to increase with inflation. Many of these respondents say that they are trying to move into stocks that can sustain in a high-inflation environment.

This compares to 12% of respondents who say they are reducing exposure in their portfolios in expectation of a market correction. Many say they are trying to move into gold or other materials that historically have held up against the depreciation of the U.S. dollar.

Another 9% of respondents convey a mixed outlook, stating that they are uncertain or are currently monitoring to see what will happen in the short term. Finally, about 6% say that they are trying to generate extra income by moving into stocks that have higher dividend yields. Some state that they are moving into Treasury inflation-protected securities (TIPS) in case the U.S. defaults on the bonds that they currently own.

Here is a sampling of the responses:

• “Even though I am not that positive on the market, I am staying pretty fully invested hoping that the market will outperform whatever inflation we have. The big question right now is the virus though.”
• “I believe inflation is higher temporarily, which will support higher stock valuations.”
• “I’m looking for firms that can take advantage of increasing inflation.”
• “The stock market is hitting new record highs. There is nowhere to go but back down. Don’t buy at the top.”
• “It is making me less interested in fixed-income assets, while looking to sectors that are going higher due to supply chain issues.”

See more Sentiment Survey results.