Many investors seem to be pessimistic about the direction of the market. If history is any indicator though, that’s a bad time to get out of stocks.
The American Association of Individual Investors polls its 125,000-plus members weekly on their expectations for the stock market over the next six months.
The proportion expecting the market to fall is used to form a “bearish” sentiment indicator.
As of 13 February, the trailing eight-week average bearish percentage was about 37.7% – above the historical average of 31.0% since September 1987 and the highest since 16 November 2023.
Investors should be careful how much trust they put into these glass-half-empty views.
Bearish response levels above the historical mean were followed by an average six-month US market return of 6.2%. That’s close to the average return of 5.9% following below-average bearish levels.
Overall, there’s little discernable relation between the sentiment indicator and subsequent returns.
EXHIBIT 1
Six-Month US Stock Market Returns vs. the Portion of Investors Expecting the Market to Go Down
11 September 1987–31 December 2024
US stock market represented by the Fama/French Total US Market Research Index. Bearish sentiment data provided by the American Association of Individual Investors.
The Fama/French indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. See “Index Descriptions” for descriptions of the Fama/French index data.
Index Descriptions
Fama/French Total US Market Research Index: July 1926–present: Fama/French Total US Market Research Factor + One-Month US Treasury Bills. Source: Ken French website.
Results shown during periods prior to each index’s inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.
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