NYSE
Investors are becoming less confident in the stock market. Don’t expect prices to go up much from here.
Investors have turned slightly more bearish on stocks, data show. The percentage of respondents surveyed by the American Association for Individual Investors that are bullish, minus the share that are bearish, recently hit 24 points, down from 30 just two weeks ago. The reading rarely goes above 30 and has never moved far above it since 2010, according to RBC Capital Markets data.
That level of optimism had contributed to a hot market. The
rose as much as 12% for the year to date, before the last few days of selling reduced that gain slightly. Now, “Individual investor sentiment has started to deteriorate,” writes Lori Calvasina, chief U.S. equity strategist at RBC.
Similar peaks in sentiment have proven to be negative for the equity market in the past. In the three months following a 30 reading, the S&P 500 has been flat, on average, based on data going back to 1987, according to RBC. In the year following such a reading, the index typically gains just 1%.
Today, any nervousness on stocks stems from the expectation that economic growth will peak within the next few months, while inflation forces the Federal Reserve to lift interest rates sooner rather than later. Higher interest rates make stocks less appealing relative to bonds.
Although the so-called bull-versus-bear reading is only one negative indicator for stocks, others have recently emerged. Forecasts for earnings aren’t being raised as frequently as a few months ago. Margin debt—money borrowed to buy stocks using existing shares as security—is relatively high, so investors could come under pressure to sell if a decline in the market prompts lenders to demand more collateral on those loans. Company insiders have been selling stocks.
These developments don’t mean doom and gloom for stocks on their own, but they are all happening at once. This doesn’t exactly paint a positive picture for the market.
It isn’t a surprise to see investors get just a little less excited for the moment.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
