AAII Sentiment Survey: Pessimism at Highest Level Since May 2010

Bullish sentiment plunged 10.7 percentage points in the latest AAII Sentiment Survey. The proportion of individual investors who expect stock prices to rise over the next six months fell to 27.2%, an eight-week low. The historical average is 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, dropped 7.8 percentage points to 23.0%. This is the lowest neutral sentiment has been since February 3, 2011. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, surged 18.4 percentage points to 49.9%. This is the highest level of pessimism since May 27, 2010 and the biggest weekly percentage point increase since July 20, 2006. It is also the 21st time in the 24 weeks that bearish sentiment has been above its historical average of 30%.

There was a large amount of headline risk throughout the survey period. Events contributing to the negative sentiment included the debt ceiling debate, weak economic data such as second-quarter GDP and the July ISM manufacturing survey, and a eight-day losing streak for the Dow Jones Industrial Average. Many individual investors already had concerns about the pace of economic growth, so it is not surprising to see their nerves rattled by the negative headlines.

Wall Street sign
Paul Giamou | Aurora | Getty Images
Wall Street sign

At current levels, bearish sentiment is unusually high, but not extraordinarily so. Two standard deviations above the historical average is 50.7%, and levels above that mark are outliers.

This week's special question asked AAII members what impact, if any, the debt ceiling debate has had on U.S. economic growth. The majority of respondents said that the debate had a negative impact, though many thought it had little or no impact. There was a large variance in the comments with many expressing frustration at politicians and the political process. Some thought the debate and the lack of a long-term solution has created uncertainty. It should be noted that many AAII members had expressed concerns about the size of the federal deficit before the recent debt ceiling debate occurred.

Here is a sampling of the responses, some of which were given before the debt ceiling debate was resolved:

  • "I expect a negative impact because the debt ceiling increase is now and the meager cuts are a future promise at best."
  • "I think the uncertainty of the outcome of the debate (over not only the debt ceiling, but future tax policy, healthcare and federal regulations) has caused businesses—big and small—to move cautiously."
  • "It was another hurdle for an already frail market to overcome. In the short and perhaps long term, it did considerable damage to our economy."
  • "A negative impact. Congress is just delaying problems rather than dealing with them."
  • "Very little impact. It's market noise and doing nothing more than adding to the short-term volatility."

This week's Sentiment Survey results:

  • Bullish: 27.2%, down 10.7 percentage points
  • Neutral: 23.0%, down 7.8 percentage points
  • Bearish: 49.9%, up 18.4 percentage points

Historical averages:

  • Bullish: 39%
  • Neutral: 31%
  • Bearish: 30%

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 to Wednesday The survey and its results are available online.

Charles Rotblut, CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.