With inflation running rampant and the Federal Reserve on course to take measures to tackle rising prices, investor hopes for stock market gains hit their lowest level in decades. In the latest American Association of Individual Investors poll of retail investors, the share of bullishness, or hopes for a higher stock market over the next six months, slumped to 15.8%, down nearly 9 percentage points over just the past week. That's the lowest level in almost 40 years. The last time there were fewer optimists was in September 1992, an election year and one in which the U.S. was emerging from a recession and the Persian Gulf War. Under normal circumstances, such dour sentiment levels would be a sure-fire contrarian sign that the market was about to take off, or at least that returns ahead would be higher than normal. But with uncertainty running this high, getting a signal from the AAII results is a little more difficult. "It's definitely a healthy setup, but that was the set for a day like [Wednesday]" in which major averages rallied by more than 1% , said Peter Boockvar, chief investment officer at Bleakley Advisory Group. He added that the AAII survey is "extraordinarily fickle week to week. All you need is a couple-day rally and you'll see the bulls jump back up again." Boockvar pointed out that the Investors Intelligence survey, which gauges expectations from professional newsletter editors, shows a near-even balance between bulls and bears, which he thinks is probably more representative of the longer-term outlook. The AAII results show, however, if nothing else that retail investors are on edge about the multiple crosscurrents they are confronting on a daily basis. The war in Ukraine has put added pressure on markets as it influences inflation, which already was running at a 40-year high. At the same time, the Federal Reserve is taking a series of measures aimed at reining in price increases, specifically the likelihood of multiple, aggressive rate hikes as well as an unwind of the nearly $9 trillion in assets it is holding on its balance sheet. The uncertainty surrounding all those factors is making for a challenging investing landscape. "That number reflects concerns over the Fed's ability to raise rates and move toward price stability without a recession," said Quincy Krosby, chief equity strategist at LPL Financial. "When you get the Fed raising rates, the market can still climb higher. The concern that investors have is if the Fed is able to navigate the rate-hike cycle, coupled with unwinding the balance sheet." At their last meeting, Federal Open Market Committee members discussed cutting bond holdings by up to $95 billion a month. The process is expected to be gradual, with the Fed moving in about $30 billion increments until August when up to $60 billion in Treasurys and $35 billion in mortgage-backed securities will roll off the balance sheet each month. That's a bigger endeavor than anything the central bank has done in the past, and is bound to jangle investors nerves. "We always have to remember how this winding down of the balance sheet ultimately is going to affect the markets," Krosby said. "We always hear about interest rates. It isn't just the rate hikes. It's this combination of raising rates and the specter of unwinding the balance sheet that's hanging over the landscape."
People walk along Wall Street in the financial district of Manhattan on September 29, 2021 in New York City.
Spencer Platt | Getty Images
With inflation running rampant and the Federal Reserve on course to take measures to tackle rising prices, investor hopes for stock market gains hit their lowest level in decades.