Investing

With stocks tanking, pessimism among mom and pop investors hits highest in more than five years

Key Points
  • Nearly 50 percent of retail investors think the market will be lower in six months, according to the latest American Association of Individual Investors survey.
  • That's the highest level since April 11, 2013, and comes amid a rough month for Wall Street.
  • The good news is that the last time the bulls were this down, the market rallied 16 percent into the end of the year.
Markets continue to fluctuate — Here's what four experts say it could mean for investors
VIDEO2:4502:45
Markets continue to fluctuate — Here's what four experts say it could mean for investors

A brutal fourth quarter for the stock market is exacting a substantial price on investor psychology, particularly for the mom and pop crowd.

Pessimism among retail investors is at the worst level in about 5½ years, according to the latest American Association of Individual Investors survey. The 48.9 percent of those who think the will be negative in six months is up 18.4 percentage points from last week's reading and is the highest since April 11, 2013.

The drop came just before the market turned a mild upswing in an otherwise nasty period.

Worries about rising interest rates, a testy trade showdown between the U.S. and China, and fears about slowing growth both domestically and abroad have hit Wall Street hard since early October. The S&P 500 is off more than 9 percent in the quarter, while the Dow Jones Industrial Average has fallen about 7.2 percent and the Nasdaq is off some 11.6 percent.

Retail investors have low levels of confidence in market
VIDEO3:1903:19
Retail investors have low levels of confidence in market

The surge in pessimism has come with a corresponding slide in bullishness. Optimism tumbled 17 percentage points during the week, falling to 20.9 percent and representing the worst level since May 25, 2016. Neutral sentiment edged down 1.3 percentage points to 30.2 percent, just below its historical average of 31 percent.

Those hoping the market turns around actually can take some solace from the AAII numbers. Such sentiment indicators are contrarian in nature, particularly at extremes, and this survey is no different.

In fact, the last time the bears were this plentiful presaged a sharp turn higher. The S&P 500 rallied 16 percent from the April 11 low through the end of 2013.

Investor behavior has gotten more defensive lately, with money flowing out of equity funds and cash allocations among AAII respondents hitting a 33-month high in November.

In this week's survey, investors remained generally upbeat about the economy, with 25 percent expecting a continued expansion in 2019 though at a slower pace. Just 13 percent see a recession in the year ahead.