By Ryan Vlastelica, MarketWatch
The glimmer of hope that investors had been feeling seems to have been snuffed out to a modest degree.
A closely watched survey of investor sentiment showed a pronounced rebound in caution over the past week, a move that was related to a sharp drop in the percentage of respondents who consider themselves bullish on the market.
[post_ads]The AAII Investor Sentiment Survey showed that 34.7% of investors describe themselves as optimistic on U.S. stocks, defined as their expecting prices to be higher in six months. This represents a decline of 8.4 percentage points from the previous week; that decline was enough to return the reading under its long-term average of 38.5%.
The drop in bullishness didn’t correspond with a rise in bearishness, however. This reading also saw a week-over-week decline; 24.9% of those polled said they were pessimistic about the market over the coming six months, a drop of 4.2 percentage points from the previous week. This put the reading further below its historical average of 30.5%.
The biggest change on the week related to neutral sentiment, or the view that prices should remain essentially unchanged over the remainder of the year. More than 40% of those polled described themselves a neutral, a two-month high, and a level that AAII described as “unusually high,” meaning it is at least one standard deviation above the historical average of 31%.
Neutral sentiment has been elevated for an extended period, coming in above its long-term average in 21 of the past 22 weeks. (Last week was the first week in five months where it was below that average.) The stretch of elevated neutral readings has coincided with a lengthy stretch where major indexes have been largely rangebound. Both the Dow and the S&P 500 last put in highs for the year in late January, and a 2018 nadir in early February.
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The shift back toward caution, if not outright fear, came in a week where trade issues returned to the forefront. Among recent developments, President Donald Trump said he was “ready” to put tariffs on all Chinese goods imported to the U.S., which would amount to more than $500 billion. The comments, given in an interview with CNBC, were the latest in a series that pointed to worsening trade relations. On Thursday, Trump threatened “tremendous retribution” against the European Union and stood by a pledge to levy tariffs on automobile imports.
The threat of trade issues escalating into a full-scale trade war have limited stock gains despite an earnings season that is coming in stronger than expected. According to FactSet, with 16.4% of the S&P 500 having reported, companies are posting earnings growth of 21% and revenue growth of nearly 8.5%.
Thus far this week, the Dow (DJIA) is up 0.2%, the S&P 500 (SPX) is up 0.1%, and the Nasdaq (COMP) is flat. For the year, the Dow is up 1.4%, the S&P has risen 3.2%, and the Nasdaq has surged 13.4%.
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