Investors More Bullish on Stocks — but That May Be a Bad Omen

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Investors have turned more positive on stocks amid expectations that Federal Reserve interest-rate tightening is near an end.

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As stocks surge this year, retail investors have grown more enthusiastic about the market.

The AAII Sentiment Survey, which measures those investors’ attitudes toward the market, showed them leaning bullish in the week ended Feb. 8. That’s the first such reading since last April. AAII is the American Association of Individual Investors.

One of the survey’s key indicators is the spread between the percentage of investors who are bullish and those who are bearish. When the bulls tally is higher than the bears tally, investors overall are bullish.

In the latest week, 37.5% of individual investors were bullish, while 25% were bearish (the remaining 37.5% were neutral). That put the bull-bear spread at 12.5 percentage points, the first positive reading since April. The 37.5% bullish figure was the highest since December 2021.

Investors have turned more optimistic on stocks amid expectations that the Federal Reserve soon will stop raising interest rates and that the economy won’t fall into a recession.

Sentiment Index Is a Contrarian Indicator

Investors’ newfound positivity might seem all well and good for the stock market. But that’s not the case. A high level of bullishness often is followed by declines in stock prices. And high bearishness often precedes rising stock prices.

Meanwhile, the neutral reading of 37.5% for the latest week was above its historical average of 31.5% for the sixth straight week. That may point to investor uncertainty.

Separate from the survey, a good case can be made both for and against stocks. Two factors the bulls often cite are those mentioned above: anticipation of a quick end to Fed rate hikes and growing economic strength.

Inflation has eased, with the consumer price index rising 6.5% in the 12 months ended December, down from a peak of 9.1% in June. That has led some economists and investors to predict that the Fed will execute two more rate hikes and then stop, helping stocks.

But stock-market bears say more than two rate increases may be coming. The economy’s strength might cause inflation to stop falling and perhaps to resume its climb. And that could lead the Fed to continue its rate hikes.

Hiring and Wages are Rising

One sign of the economy’s fortitude is the labor market. Nonfarm payrolls soared 517,000 in January.

Moreover, wage growth remains strong, though it is coming down. Average hourly wages rose 4.4% in the 12 months through January, down from 4.8% in December. If wage growth stops falling, that could make the Fed more hawkish, hurting stocks.

One positive feature of strong economic growth is that it should boost earnings. Results for the fourth quarter have been weak, with earnings already reported and projections for the rest pointing to a profit drop of 5.3% for the S&P 500, according to FactSet. But what will follow remains a toss-up.

So it’s difficult to argue against those who are bullish, bearish or neutral on stocks.

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