There has been nowhere to hide in 2022. US stocks have fallen for three consecutive quarters. Bonds often do well when stock markets are shaky, but not in 2022. Instead, bonds have also fallen in the first three quarters of 2022 – the first time since at least 1976 that both stocks and bonds have fallen in three consecutive quarters, notes Willie Delwiche of All-Star Charts.
The persistent selling and the lack of safe harbours has, as Delwiche puts it, “taken a financial and emotional toll on investors”. This emotional toll is reflected in miserable sentiment surveys. Over 60 per cent of investors described themselves as bearish in a recent American Association of Individual Investors (AAII) poll. That’s the most extreme reading since March 2009.
Bearish sentiment has only ever exceeded 60 per cent on four occasions in the survey’s 35-year history. Nor was this a one-off reading. Bearishness exceeded 60 per cent the following week, the first time in history that pessimism topped 60 per cent on consecutive weeks.
The AAII notes extremely bearish sentiment is associated with above-average six- and 12-month returns, although Delwiche cautions this time may yet be different. Investors may be fearful, but they are not panic-selling, with separate AAII asset allocation surveys showing equity exposure remaining well above levels seen during past bear markets.
“Sentiment extremes can be valuable contrarian indicators,” says Delwiche, “but this can’t work as well if sentiment is divorced from positioning.”
