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Investor pessimism is falling, but not because they’re suddenly bullish


U.S. investors have turned a little less bearish on the stock market, but it isn’t because they’re suddenly optimistic.

A number of ongoing headwinds and uncertainties — ranging from trade-policy uncertainty to the impact that rising bond yields and changing central-bank policy will have on stocks — has kept equities in a tight trading range for months.

The Dow Jones Industrial Average

DJIA, +0.01%

 is flat this year, and the S&P 500

SPX, -0.23%

 is up about 1.5%.

With Wall Street apparently aimless, showing few pronounced moves in either direction, market participants have apparently followed suit with their views on where things could be headed. But while investors can’t be described as fearful, there are also few signs of enthusiasm, let alone euphoria.

According to the AAII Investor Sentiment Survey, just 20.6% of investors describe themselves as bearish, meaning they expect stocks to be lower six months from now. That’s a drop of five percentage points from last week, which not only makes it the second-lowest reading of the year, but puts it in “unusually low” territory, just barely eking below the 20.7% threshold that AAII uses to determine that level.

Bearish sentiment has been below its long-term average of 30.5% for five straight weeks, as well as in 19 of the past 23 readings.

However, the opposite doesn’t exactly apply to bullish sentiment. While it rose by 3.2 percentage points in the latest AAII survey, at 36.7% it is below its long-term average of 38.5%. This is the 12th straight week that optimism has been below its historical average.

The dominant view on markets seems to be tepid one. Fully 42.7% of investors describe themselves as neutral on the market, expecting things to remain essentially unchanged over the coming six months. This is the highest reading for neutral sentiment since March, and it represents the 13th straight week that it has been above the historical average of 31%.

Read: The result of all the volatility in 2018’s stock market: Nothing

That a plurality of investors are neither optimistic nor pessimistic reflects the general view of analysts, investment banks, and fund managers. There are growing concerns that the economy is in the late stage of the economic cycle, although most believe that there are months, if not years, before it turns into recession. Morgan Stanley has warned about “the end of easy,” in terms of making money from stocks, calculating that expectations for future returns were at an 11-year low, or at their weakest level since before the financial crisis.

According to the latest BofA Merrill Lynch survey, the ratio of fund managers who expect the global economy to be stronger in a year is at its lowest reading since February 2016, although more than three-fourths of surveyed investors said the stock market hadn’t peaked, and 43% said the next recession wouldn’t start until 2020 or later.

Learn more: What investors have to look forward to: no recession, but limited growth

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May 18, 2018

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