AAII Sentiment Survey: Deers in the Economic Headlights

Bullish sentiment, expectations that stock prices will rise over the next six months, dipped back below the historical average of 39.0%, after rising above it last week for the first time in 12 weeks. Bullish sentiment has now been below its historical average of 39% for 23 out of the last 27 weeks.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, jumped 5.5 percentage points to 29.4%. This is a six-week high. Even with the improvement, neutral sentiment stayed below its historical average of 31% for the 14th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 1.8 percentage points to 34.6%. This is the fourth consecutive week that pessimism has decreased. Even with the drop, bearish sentiment remained above its historical average of 30% for the 32nd time in the past 35 weeks.

AAII members have become less glum about the short-term outlook for stocks over the past few weeks. This is particularly evident in the bull-bear spread (bullish sentiment minus bearish sentiment), which is positive for the second consecutive week. Optimism is cautious, at best, as concerns about the economy, Washington and European sovereign debt weigh on individual investors’ moods.

This week’s special question asked AAII members if this year’s holiday shopping season will be better or worse than last year’s. (The National Retail Federation forecasts holiday sales will rise 2.8%.) Responses were evenly split between those who predict consumers will spend more and those who expect less holiday spending. (A smaller group thought sales would be flat.) Those who are optimistic cited pent-up demand, greater confidence among those who have jobs and the recent returns charted by retail stocks. Those who are pessimistic cite high unemployment, economic uncertainty and rising living costs.

Here is a sampling of the responses:

  • “More holiday spending. If you have a job, life isn’t bad and people held back during the last two years.”
  • “More spending. I was in a major toy retailer’s store this past week and was surprised by the high level of activity.”
  • “Consumers will spend less because of the weak economy.”
  • “With so many people unemployed and living expenses that have increased, I can’t see money being spent that people don’t have.”
  • “Since incomes are stagnant for those who have jobs, I think holiday sales will be about the same as last year.”

This week’s AAII Sentiment Survey results:

  • Bullish: 36.0%, down 3.8 percentage points
  • Neutral: 29.4%, up 5.5 percentage points
  • Bearish: 34.6%, down 1.8 percentage points

Historical averages:

  • Bullish: 39%
  • Neutral: 31%
  • Bearish: 30%

Charles Rotblut is the author of the new book Better Good than Lucky: How Savvy Investors Create Fortune with the Risk-Reward Ratio. The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat, or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at http://www.aaii.com/sentimentsurvey