Since 1987, the American Association for Individual Investors (AAII) has been conducting weekly surveys to assess investor sentiment regarding the financial markets. You may have heard references to “investor sentiment” in the financial media – they are usually referring to AAII’s weekly survey. These surveys are conducted from 12:01am on Thursday to 11:59pm on Wednesday, with the prior week’s data released on Thursday as data collection for the current week begins (this will be relevant in a moment). Any statistician will tell you to be wary of survey data; nevertheless, the stock market is made up of people, people act on emotion, and the AAII survey offers a peek into the mind of the investors that make up the stock market.
On Wednesday, February 19th of this year – just a few weeks ago – the S&P 500 notched an all-time high of 6,147. The AAII sentiment survey released on Thursday, February 20th showed bearish (bearish = expects the market to fall) sentiment at 40% (long-run average is 31%). Curious but not quite newsworthy. There is a miserable class of investors condemned to believe all-time highs foreshadow a precipice. The week following the February 19th high showed the S&P decline 3.06%. The next sentiment survey released on February 27th showed bearish sentiment jumping to… 61%.
That’s good for the seventh highest reading ever since the survey’s inception in 1987, despite only a three percent drawdown. The only readings that eclipsed February’s latest reading occurred during the 1990 recession and Iraq’s invasion of Kuwait, the 2008 global financial crisis, and the recent 2022 bear market. During the height of the pandemic sell-off in 2020 the survey only peaked at 52% bears! Here’s where the S&P 500 closed the day of the seven highest bearish sentiment readings on record in chronological order:
It is a bit counterintuitive, but we are pleased when we see sentiment sour in the midst of a bull market. Diminished expectations make it easier for corporations to exceed expectations which lead to climbing stock prices. Investors are quick to catastrophize in the face of negative headlines – those fears get baked into stock prices and form the foundation of a wall of worry the stock market eventually climbs as investors’ worst fears never fully materialize. Sure, this could be the beginning of a bear market, or a recession – or whatever – that is always a possibility but never a probability. In the post-war era, the five bull markets that have made it into their third year (as this one has), have lasted an average of eight years with the shortest being five. Each of those bulls ran into speedbumps like we’ve seen recently many times. We are watching the stock market transfer wealth from the impatient to the patient.
If you would like a glimpse into how traditional financial media covers market turbulence, here are a few quotes from an article on CNBC:
“The S&P lost $1.91 trillion… the worst month for the S&P 500 since September 2011… volatility is legendary, and we’re not just talking about the crash of 2008… a much more volatile month than any of the others as far as quick declines go… The month kicked off on a rocky note for stocks when Federal Reserve Chairman Jerome Powell said the central bank is ‘a long way’ from neutral interest rates… Big technology stocks: Facebook, Amazon, Netflix, and Google parent Alphabet – were among the hardest hit… The index fell below its 200-day moving average… Company leaders commented on increased costs from global risks such as rising interest rates… and the trade war with China… Semiconductors were one of the hardest hit sectors in the stock market… Shares of Nvidia, Advanced Micro Devices, Micron, and Applied Materials are all down double-digits…"
There’s a catch. That article was published on October 31, 2018. The height of Trump Trade War 1.0.
The level of the S&P 500 the day that article was published? 2,711.
The level of the S&P 500 as of this writing is 5,628.
Those that tuned out the noise and let their own plan dictate their portfolio allocations rather than current events participated in equity returns between Trump Trade War 1.0 and 2.0 of 136.5%. Those who reacted to fears of trade wars, interest rates, and tech sell-offs in 2018 saw their wealth delivered to the dominion of more patient investors.
In the long run, this time will be no different.
Sean Cawley, CFP®
*Data: YCharts, MacroCharts
CNBC Article: https://www.cnbc.com/2018/10/31/the-stock-market-lost-more-than-2-trillion-in-october.html
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