Kristina Hooper, CFP®, CIMA® is Head of Investment and Client Strategies for Allianz Global Investors Distributors LLC. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
The American Association of Individual Investors’ weekly investor survey showed pessimism has risen to the highest level in more than a year. Bearish sentiment among individual investors rose 8.9 percentage points to 48.8% while bullish sentiment among investors fell 9.7 points to 28.8%. Those investors in neutral territory grew slightly, .8 points to 22.4%. Bearish sentiment is actually at a level that has not been seen since the debt-ceiling crisis of August 2011.
But it’s not just individual investors who feel this way. The latest US Investor’s Intelligence Advisor Sentiment Index, a survey of 130 independent stock-market newsletter editors, shows a one-percentage point increase in bearish sentiment to 28.7%. The poll showed that bullish sentiment decreased to 38.3% from 43.6%. There was a larger jump in the correction level, which moved to 33.0%, from 28.7% last time. Bullish sentiment had been as high as 54.2% in September.
Stocks are behaving quite bearishly. We’ve seen a recent—and rather dramatic—change in the Delta Tactical Market Sentiment Index, which measures the position of approximately 3,600 stocks. When more than 50% of stocks are above the crossover point, the market is considered to be bullish and equities are viewed as attractive. Conversely, when more than 50% of stocks are below the crossover point, the market is considered bearish and equities are viewed as unattractive. Just two weeks ago, the Delta MSI was at 50.5%. Last week it dropped to 32.6%, well within bearish territory.
Company management teams are also growing more pessimistic. Through Friday, 72 companies have issued negative earnings guidance while 28 companies have issued positive earnings guidance for fourth-quarter earnings. In early October, we learned that the quarterly Conference Board Measure of CEO Confidence had fallen to 47 to 42 in the second quarter. (A reading of more than 50 indicates positive sentiment.)
But it’s not all bad. There are some constructive points to counterbalance all this bearishness. One place where we are seeing positive sentiment is among consumers. In fact, a preliminary reading of the University of Michigan Consumer Sentiment Index shows that confidence is expected to remain above 84. Positive consumer sentiment could translate into substantially higher spending and GDP growth, as consumer spending comprises more than two thirds of GDP. Meanwhile, the housing recovery appears poised to continue. According to the Mortgage Bankers Association, mortgage applications increased 12.6% last week while refinancing activity rose 13%. And the average rate on a 30-year fixed mortgage fell to a record low last week.
The Fed is also helping to restore faith in a recovery. Minutes from the most recent FOMC meeting in October show that FOMC members believe the economy continues to improve, albeit at a modest pace.. The recent data on household spending, consumer sentiment and the housing market proved “encouraging” and most FOMC members anticipated that “highly accommodative” monetary policy” would provide support for the recovery. Of course, the outlook is not entirely rosy. Many FOMC members worry that the fiscal cliff and financial issues in the euro zone could become speed bumps for the economy in the coming months. In addition, concerns of “more widespread weakness in global economic activity or an intensification of strains in global financial markets” continue. The good news is that the FOMC anticipates embarking upon a new bond-buying program, which should help stimulate the economy.
Many investors are confused about what to do in this environment. It may be helpful to consider the role emotion plays in investing. Consider the concept of an emotional investment timeline. The CFA Institute explains that the timeline moves from left to right, with investment decisions at the left and goals at the right. The CFA Institute explains that it shows that investors experience a variety of emotions in pursuit of a goal. Hope and fear are two emotions that are constantly at odds. “Hope becomes anticipation and is then transformed into pride” while “fear becomes anxiety and is then transformed into regret.”
Investors with longer timelines can’t allow fear to dictate their investing decisions, especially since extreme bearishness can signal the start of a shift to positive sentiment. Consider that the last time the Investors Intelligence Advisor Sentiment Survey fell below 39 was on June 26, when the S&P 500 was at 1,319.99. In the subsequent three months, it rose 9.2% to 1441. It’s a question of confidence. And when fear grips investors, it can lead to decisions that undermine long-term goals.
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