Investors and consumer sentiment have proven essential for Federal Reserve (Fed) Chair Jerome Powell and the economy, as these have the potential to accelerate or decelerate economic cycles. “The longer inflation remains well above target, the greater the risk the public does begin to see higher inflation as the norm, and that has the capacity to raise the costs of getting inflation down,” Powell said in his latest speech, reiterating his previous stance.
The American Association of Individual Investors (AAII) Sentiment Survey reflects the sentiment of individual investors toward the stock market over the next six months by asking whether they are bullish, neutral or bearish.
Based on these polls, bearish readings have been reaching highs not seen since the 1990s. During the week ending Sept. 7, 53.3% of respondents indicated bearish sentiment — a slightly lower percentage than the high mark over the past year of 59.4%, which occurred during the week ending April 27. Meanwhile, bullish readings (18.1%) slipped to their lowest quarterly mark since 1989, and a record weekly low of 15.8% in April.
This week’s chart shows that throughout the last five years, when the bearish readings index peaked and the spread against bullish readings increased, the S&P 500 Index followed by selling off. This phenomenon has become even more noticeable since 2021, with social media usage enhancing the ability of retail investors to alter the market.
Currently, we can see the spread between these indices is at its highest in the last five years — reflecting the impact of increased investor pessimism about the next six months, which is keeping bullish sentiment far below its historical average of 38%. This aligns with the message from the Fed regarding its commitment to decrease inflation and not let the current state of the economy become the new norm.
There is currently a feeling that good news has become bad news and vice versa. In a time when news is spread within seconds, investors and consumer sentiment have become more important data points for the Fed. Powell has put a strong emphasis on avoiding a scenario where consumers believe that high inflation will become the new norm, and made it clear that the Fed is willing to risk causing temporary “pain” to the economy in an effort to bring inflation back down. The AAII Sentiment Survey shows that investors believe the market will experience further sell-offs as a trade-off to the Fed’s actions, and trust this environment will not become the new norm.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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