With stocks tanking, pessimism among mom-and-pop investors hits highest level in five years

FAN Editor

A brutal fourth quarter for the stock market is exacting a substantial price on investor psychology, particularly for the mom-and-pop crowd.

Pessimism among retail investors was at worst level since in about 5½ years, according to the latest American Association of Individual Investors survey. The 48.9 percent of those who think the S&P 500 will be negative in six months is up 18.4 percentage points from last week’s reading and is the highest since April 11, 2013.

The drop came just before the market turned a mild upswing in an otherwise nasty period.

Worries about rising interest rates, a testy trade showdown between the U.S. and China and fears about slowing growth both domestically and abroad have hit Wall Street hard since early October. The S&P 500 is off more than 9 percent during the quarter, while the Dow Jones Industrial Average has fallen about 7.2 percent and the Nasdaq is off some 11.6 percent.

The surge in pessimism has come with a corresponding slide in bullishness. Optimism tumbled 17 percent points during the week, falling to 20.9 percent and representing the worst level since Mary 25, 2016. Neutral sentiment edged down 1.3 percentage points to 30.2 percent, just below its historical average of 31 percent.

Those hoping the market turns around actually can take some solace from the AAII numbers. Such sentiment indicators are contrarian in nature, particularly at extremes, and this survey is no different.

In fact, the last time the bears were this plentiful presaged a sharp turn higher. The S&P 500 rallied 16 percent from the April 11 low through the end of 2013.

Investor behavior has gotten more defensive lately, with money flowing out of equity funds and cash allocations among AAII respondents hitting a 33-month high in November.

In this week’s survey, investors remained generally upbeat about the economy, with 25 percent expecting a continued expansion in 2019 though at a slower pace. Just 13 percent see a recession in the year ahead.

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