AAII Sentiment Survey: Optimism Continues to Hover Above Its Historical Average

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Optimism about the short-term direction of stock prices stayed slightly above its historical average for the fourth consecutive week in the latest AAII Sentiment Survey. Pessimism rebounded, but remains below its historical average.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 0.8 percentage points to 40.5 percent. The historical average is 39.0 percent.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, fell 6.3 percentage points to 32.9 percent. Even with the drop, this is the ninth consecutive week with a neutral sentiment reading above its historical average of 30.5 percent.

Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 5.5 percentage points to 26.6 percent. The increase was not large enough to prevent pessimism from being below its historical average of 30.5 percent for the 22nd time in 26 weeks, however.

Only two other periods with pessimism staying below its historical average have existed over the past 10 years. The first was a 20-week span between August 19, 2004 and December 30, 2004 with 16 weeks of pessimism below 30.5 percent. The second was a 23-week span between September 16, 2010 and February 17, 2011 with 20 weeks of pessimism below 30.5 percent.

When looking at the current trends in individual investor sentiment, it is important to note the lack of high levels of optimism. Although pessimism has mostly been stayed below average over the past six months, bullish sentiment among AAII members — in aggregate — has mostly been levels we would not consider to be enthusiastic.

The events in Ukraine do not appear to have significantly impacted individual investors’ short-term outlook for stock prices so far. A few members did say, in response to this week’s special question, that the crisis is causing them to be more cautious. Some AAII members are also fretting about elevated stock valuations, the pace of revenue growth and Washington politics. Many other AAII members are encouraged by the sustained upward momentum of stock prices, earnings growth, economic growth and the Federal Reserve’s tapering of bond purchases.

This week’s special question asked AAII members how comfortable they are with prevailing stock valuations. Slightly less than half (47 percent) of respondents described themselves as uncomfortable. The primary reasons given were current price-earnings ratios and the slow pace of economic expansion, particularly job growth. About 26 percent of respondents said they are comfortable with current valuations. These members pointed to economic growth and the ability to still find stocks trading at attractive valuations. About 9 percent of respondents said they thought the market was either fairly valued or that they are still comfortable with the market at the current level even though valuations are elevated.

Here is a sampling of the responses:

  • “I’m uncomfortable. Jobs are not increasing at this time.”
  • “Valuations are quite high and a bit stretched from historical norms.”
  • “With current and future economic conditions looking good, I believe we should have a good 2014.”
  • “Valuations are historically a bit high, but this does not make me uncomfortable — only cautious.”

This week’s AAII Sentiment Survey results

  • Bullish: 40.5 percent, up 0.8 percentage points
  • Neutral: 32.9 percent, down 6.3 percentage points
  • Bearish: 26.6 percent, up 5.5 percentage points

Historical averages

  • Bullish: 39.0 percent
  • Neutral: 30.5 percent
  • Bearish: 30.5 percent

Charles Rotblut is the author of the new bookBetter 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 here.

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