Three Views On Sentiment
In early June, the S&P 500 Index closed above its April 20 high, while the Dow Industrials sit just 91 points below their own April 20 high. The indexes have rallied at least 15% from February lows.
Not surprisingly, the market's gains over the last four months have improved the mood of investors, with surveys of both advisers and individuals showing a rise in bullishness and a decline in bearishness.
Of course, an improvement in sentiment doesn't mean everyone is suddenly happy. Slow economic growth, weak corporate earnings, the upcoming presidential election, and possible interest-rate hikes make many Americans nervous.
At times like this, we can gain insight by comparing sentiment levels to both recent and long-term norms. This week we look at the market through the eyes of three important groups:
The American Association of Individual Investors Sentiment Survey tends to provide volatile results from week to week. While we don't infer much from an individual week's reading, trends matter. Here are three trends to watch:
1) In four of the last five weeks, the percentage of bullish investors hovered below 23%, ranking among the lowest 6% of weekly readings since 1987.
2) Over the last six weeks, the percentage of bearish investors has averaged 30.5%, in line with the long-run average. The bearish percentage last topped 35% in mid-February.
3) Uncertainty reigns, with the percentage of investors taking a neutral stance unusually high. In four of the last five weeks, the neutral percentage exceeded 46%, in the top 5% of weekly readings since 1987. In the week ended May 26, nearly 53% of investors called themselves neutral, the highest percentage in 26 years. Neutral sentiment has hovered above the long-run average for most of the last year.
In the week ended June 1, bullishness bounced to 30.2% from 17.8%, the highest percentage in six weeks but still well below the long-run average of 38.5%. The neutral percentage declined to 40.8%, versus the long-run average of 31.2%, with bearishness roughly flat. Last week could mark the start of a return to long-run averages — or it could prove no more than a blip. Either way, individual investors are more skittish than usual.
Investors Intelligence data shows bullishness up and bearishness down over the last four months, similar to the path of the AAII survey. We tend to put more faith in the survey of editors than the survey of individuals, which is less scientific and has historically delivered more volatile results.
The fact that each survey corroborates the other increases our confidence in the broad trend. But the adviser survey differs in a couple ways:
• The bullish percentage of 47.3% is slightly above the average of 46.1% since 1989, while the bearish percentage of 23.8% is below the long-run average of 30.0%. Advisers are more confident than individual investors, both on an absolute basis and relative to historical norms.
• The bull/bear spread — the percentage of bullish advisers minus the bears — jumped to 23.5% last week, the highest level since April and higher than the long-run average. When the spread topped 25% in April, Investors Intelligence said the divergence increased the chance of a trading top; the spread is approaching that level now.
Unlike the investor surveys, gauges of consumer confidence moved in different directions last month.
The Conference Board Consumer Confidence Index has declined this year, in May falling to its lowest point since November. In contrast, the University of Michigan Consumer Sentiment Survey's May reading rose 6.4%, the first monthly gain of the year and the highest point since June.
Such divergence is unusual. Given time, the surveys will probably settle on one path, though we can't predict the direction. The surveys do agree on one thing: Consumers are more enthusiastic about current conditions than about expectations, a finding that corroborates the uncertainty inherent in the AAII survey data.
Investors have grown more bullish in recent months, though confidence isn't overly high, particularly for individuals. We'll keep watching the indicators, as sentiment data suggests Americans could be swayed in either direction.