Investor optimism falls to 2005 low: Survey

Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Trader on the floor of the New York Stock Exchange.

The year is only two weeks old but investors are already down in the dumps. (Tweet This)

Global equity markets kicked off 2016 on the wrong foot as concerns over a slowdown in China, as well as plunge in oil prices, have weighed. The S&P 500 has shed about 9 percent this year and has teetered in and out of correction territory, or more than 10 percent off its 52-week high, for most of the year.The Dow Jones industrial average and the Nasdaq composite have fallen about 6 percent and 7 percent year to date, respectively.

Overseas, China's benchmark Shangahi composite has plummeted nearly 15 percent for the year, while the pan-European STOXX 600 index has dropped over 7 percent.

The weekly American Association of Individual Investors survey found that only 17.9 percent of investors believe stock prices will go up over the next six months, marking the lowest level of bullishness since April 2005.

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"I think the slide correctly came out of China and reflected on commodities," said Kim Forrest, senior equity analyst at Fort Pitt Capital. "That gave investors a pause."

Michael Arone, chief investment strategist at State Street Global Advisors, said "the market is coming to realize that emerging markets — particularly China — have contributed a significant amount of global growth [for a long time]. I think the view was that the U.S. and other advanced economies would be able to pick up the slack."

The survey — released Thursday — also noted that bullish sentiment among investors has been below a historical average of 39 percent for 43 of the last 45 weeks, and has remained below 30 percent for seven weeks in a row.

Bearish sentiment — the expectation that stocks will fall over the next six months — has jumped to its highest levels since April 2013.

The weak investor sentiment has led to large spikes in volatility, "with emotional investors ready to shed risk assets at the slightest whiff of bad news," Wasif Latif, head of global multi-assets at USAA, said in a post Thursday. "Good news, on the other hand, is getting shrugged away."

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The CBOE Volatility index, commonly known as the VIX, has only traded below 20 once during 2016.

VIX from Dec. 31, 2015-Jan. 14, 2016Source: FactSet

Fort Pitt Capital's Forrest said she expects the volatility to carry out through the year "if The Fed is committed on not coming in." She also noted that Thursday's rally — which saw the Dow gain more than 200 points — was underpinned by the dovish comments made by St. Louis Fed President James Bullard, a voting member of the Federal Reserve's policymaking committee.

The rally quickly came undone, with major averages shedding more than 3 percent Friday.

Bullard said U.S. inflation expectations are falling, and that is worrisome. "Low inflation expectations may keep actual inflation lower, all else equal, making it more difficult for the Fed to return inflation to target."

"[Bullard's remarks] give investors hope that the Fed may step in and save them" by way of lower interest rates, Forrest said.

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— Reuters contributed to this report.