Bearish sentiment remains unusually high amid recent market turmoil

Yahoo Finance Live anchors Jared Blikre and Brad Smith discuss survey findings from a report conducted by the American Association of Individual Investors (AAII) that indicates elevated pessimism among investors as market turmoil continues.

Video Transcript

JARED BLIKRE: American investors are not feeling good. And recent market turmoil is to blame. And according to the latest survey from the American Association of Individual Investors, bearish sentiment, it rose to 48.9%, remaining unusually high for the fourth consecutive week. Bullish sentiment, the opposite, was up slightly, but still only hit 20.9%. It remains one of the lowest readings in the survey's history.

And, Brad, I think this is-- first of all, this is a contrary report. The AAII bullish and bearish surveys, you want to see people-- you want to capture the readings at extremes here. And I'm going to put a chart on the S&P 500. I'm going to go back over a year and show what some of the readings were at previous extremes here and why this report is actually somewhat bullish.

So we've seen we're just coming off some very low levels for bullish readings. And yet equity prices, we saw that-- we saw that big low in October. They remained relatively elevated since then. And so investors are not believing the rally so far. And they are not bearish to an extreme extent.

So I'm not seeing the catalyst here for a potential reversal either to the upside or the downside here. I think in terms of this particular report, we're not seeing the contrary readings that we would normally get at extremes. But I do find it encouraging that we don't see a lot of bullish enthusiasm, despite the fact that the market overall has not gone down, banks notwithstanding.

BRAD SMITH: Yeah, no, you make a great point. And this report also kind of echoed some of same sentiment, saying that historically, the S&P 500 index has gone on to realize above-average or above-median returns during the 6 and 12-month period following that unusually low reading for bullish sentiment and the bull/bear spread there. So that one of the points that you were getting at there.

And then even as you think about how their special question, as they called it, was asking the members how they would describe the current valuation of stocks-- and as we've continued to have day after day, time after time again these discussions with portfolio strategists or fund managers just looking at where the valuations currently stand and if they still need to come down further. We knew that coming into the start of this particular earnings season, the valuations and the earnings expectations still needed to, in tandem, come down. And so with that, the responses from the members here of this survey, only 13.6% of them saying stocks in general are fairly valued right now. Many of them still saying that stocks in general are overvalued. That's about 25% of the respondents there.

And then about 40% of them saying, eh, you know what? It's mixed at the end of the day. Valuations are mixed. Some stocks are expensive. Others are cheap right now.

And so, at the end of the day, it's for some of the larger moves that we've been tracking, especially over the course of as we round out this first quarter of 2023, just next week-- my, my, how that's going by fast.

JARED BLIKRE: Yes.

BRAD SMITH: As we round out this first quarter of 2023, even the rebound that we've seen in some sectors is really just coming off of the move lower, or concerted fashion in a move lower, that we had seen during 2022 and a little bit of nibbling or setting some longer positions that we've seen start to emerge, especially in one sector that I know is near and dear to both of our hearts, in semiconductors and tracking that over the course of the year.

JARED BLIKRE: Yeah, we'll track the semiconductors in a little bit here. Nothing further on AAII.

BRAD SMITH: Yeah.