An End-of-Summer Sentiment Check-In | MarketMinder

Nine months after the stock crash, the latest downdraft has many on edge and expecting the worst. That is understandable given the disappointing and difficult year. But while it may be hard to see at the moment, history shows that bull markets are born out of pessimism, and recent polls suggest the downward trend is extreme. This doesn’t indicate when a recovery will start or if it’s already underway, nothing does, but we see the widespread pessimism as a reason for optimism.

The widely watched Bank of America (BofA) global survey of fund managers showed a broad bearish trend in September. The latest reading indicated that most respondents are underweight equities for the first time on record.[i] Now, the records start in 2002, so it’s not a particularly long story, but it does include the bear market from 2007 to 2009 (usually a long, fundamental-driven decline that exceeds -20%) and the brief early 2020 recession for comparison. Similarly, 62% of managers are overweight cash, a reading that has never been above 60% in two decades. Also notable: 72% expect the global economy to weaken in the next year, and 68% see a recession as likely.[ii] Both rates are near record highs, surpassed only by March 2009 and April 2020. Earnings prospects are even bleaker with 92% expecting earnings to fall.

The BofA survey reflects the attitudes of professional investors: what great money managers think and (allegedly) do. But the American Association of Individual Investors (AAII) survey suggests that sentiment among individual investors is similar. AAII surveys its members weekly on their portfolio positioning: bullish, bearish, or neutral. Combining them, AAII subtracts the bearish from the bullish, resulting in its net bullish-bearish percentage. This bullish-bearish spread can be very noisy from week to week, so to smooth it out a bit, Exhibit 1 shows the four-week moving average. While it is off its summer low that coincided with the S&P 500’s June 16 year-to-date low, it remains below nearly every point in its 35-year history. While it’s not all that surprising that individual investors feel dour, the degree is quite remarkable.

Figure 1: Individual Investors Remain Notably Bearish


Source: FactSet, as of 09/19/2022. AAII Bull-Bear Market Spread, 7/31/1987 – 9/16/2022.

For a longer-term look at how pessimistic people are, we can also check out consumer sentiment, broadening sentiment outlooks beyond investors. As Exhibit 2 shows, throughout its seven-decade history, the University of Michigan (UMich) Consumer Sentiment Index hit an all-time low in June, when average national gasoline prices hit a record high of $5.02. per gallon[iii] With prices currently at $3.68 a gallon, it seems that the drop in pump prices has brought some relief. But consumer sentiment under 60 is still extremely low historically. From stocks to the economy, long-running surveys, through a myriad of market cycles, suggest that people feel worse than ever.

Exhibit 2: Consumer sentiment is as gloomy as it sounds


Source: FactSet, as of 09/19/2022. UMich Consumer Sentiment Index, January 1952 – August 2022.

It is also not true only in the United States. Take Germany’s ZEW economic expectations index as an example.[iv] Over the past 30 years, the outlook for the German economy has rarely been as dire as what economists saw last August. (Annex 3) The only worse times: the global financial crisis of 2008 and in 1992, when strong inflation led the Bundesbank to raise rates.

Exhibit 3: Economists expecting the worst in Germany


Source: FactSet, as of 09/19/2022. ZEW German Economic Outlook, January 1992 – August 2022.

However, when the moods of investors, consumers and economists plunge to depths not seen in decades, if ever, it helps set the stage for a market recovery. It’s not an accurate timing tool, of course. Nothing is: short-term movements are unpredictable. But the near-universal downtrend sets the stage for expectations to far outpace reality. In our opinion, when everyone expects the worst, it’s probably largely discounted. If the worst happens, the stock can go ahead. What if that dreaded scenario does not occur? Usually, the positive surprise drives stocks higher.



[i] “BofA Survey Shows Investors Fleeing Stocks En masse Fearing Recession”, Sagarika Jaisinghani, Bloomberg09/13/2022.

[ii] “Portfolio managers are ‘super bearish’ on highest cash holdings since 9/11, says Bank of America,” Barbara Kollmeyer, market clock09/13/2022.

[iii] Source: AAA, as of 09/19/2022.

[iv] ZEW stands for Zentrum für Europäische Wirtschaftsforschung, which if you’re wondering means Center for European Economic Research.

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