Sentiment levels have remained exceedingly high for several months now as investors begin to feel more confident in the economic recovery and believe that equity prices have but one direction to move. The latest reading from the Investor’s Intelligence survey showed another climb in bullish sentiment to 56.8%. This is the highest reading since the Fall of 2007 when equity markets were at their all-time highs.
The AAII survey is showing similar bullishness at 50.2%. This is down slightly from last week, but still well above the historical average of 39%. Charles Rotblut of AAII elaborated on the data:
“Bullish sentiment, expectations that stocks prices will rise over the next six months, stayed above its historical average for the 15th consecutive week in the latest AAII Sentiment Survey. Optimism registered 50.2%, a 2.8 percentage-point dip from the previous week.
Neutral sentiment, expectations that stock prices will remain essentially unchanged over the next six months, declined 1.8 percentage points to 22.6%. This was the 19th consecutive week that neutral sentiment has been below its historical average of 31%.
Bearish sentiment, expectations that stock prices will fall over the next six months, rose 4.6 percentage points to 27.1%. Though this is a four-week high for pessimism, bearish sentiment remains within the range we have seen since beginning of October. The historical average is 30%.
By several measures, bullish sentiment is running hot. These measures include the current reading, the number of weeks above its historical average and the eight-week moving average. However, optimism was hotter in 2004, the last time we saw a long streak of above average bullish sentiment. Thus, while bullish sentiment is hot enough to take notice, there have been past periods when it has run even hotter.”
While these surveys tend to be better indicators of near-term sentiment we are also seeing extremely high levels of bullishness in the long-term outlooks. According to Bespoke Investments there isn’t a single analyst from one of the major banks who believes equity prices will decline next year. The average expected return is 10%:
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.