AAII Sentiment Survey: Investors Lose Some Steam

Bullish sentiment, expectations that stock prices will rise over the next six months, fell to 43.8%, a 4.6 percentage-point decline. Despite the pullback, optimism is above its historical average for the sixth consecutive week and the seventh out of the past eight weeks.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, slipped 1.6 percentage points to 31.1%. Nonetheless, neutral sentiment is above its historical average of 31% for the fifth time in seven weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 6.2 percentage points to 25.1%. This is the highest level of pessimism since December 29, 2011. Even with the increase, bearish sentiment remains below its historical average of 30% for the sixth time in seven weeks.

Though the level of optimism declined in this week’s survey, individual investors continue to remain hopeful about the six-month direction of stock prices. Since bearish sentiment had been at unusually low levels and AAII members are concerned about Europe’s sovereign debt problems, a rebound in bearish sentiment is not surprising.

This week’s special question asked AAII members what impact, if any, the Federal Reserve’s decision to leave interest rates unchanged until at least 2014 had on their six-month outlook for stocks. The majority of respondents said it made them more bullish, particularly towards dividend-paying stocks. Those who said the Fed’s decision had no impact or a negative impact on their sentiment thought the news was already priced in, said Europe was a bigger issue, or expressed concerned about future inflationary pressures.

Here is a sampling of the responses:

  • “It reinforced my decision to have quality, global, superior dividend-paying stocks and ADRs make up the majority of my portfolio.”
  • “The extension of very low interest rates encourages me to seek dividend-paying stocks.”
  • “I’m slightly more positive, but this action pales in potential impact when compared to the ongoing soap opera in Europe.”
  • “Europe’s problems and congressional infighting are going to keep the market in negative territory over the next six months.”
  • “With the elections in the U.S. and the problems in Europe, I think the ups and downs will even out.”
  • “No impact. The announcement wasn’t too surprising.”
  • “I think they are out of their minds.”

This week’s AAII Sentiment Survey results:

  • Bullish: 43.8%, down 4.6 percentage points
  • Neutral: 31.1%, down 1.6 percentage points
  • Bearish: 25.1%, up 6.2 percentage points

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