Investors are Scared, but should they be?

Individual investors are scared and this is happening as the S&P 500 is within range of a new all-time highs. The bull market that started in late 2023 has been getting stronger and broader, yet individual investors are getting more pessimistic. They are watching too much television, listening to journalists who are trying to interpret the market through their specific lense, instead of listening to the market itself. They are scared and that is good for those who are invested in stocks or invested for the long-term, since you want stock prices to rise.

A quick reminder on investor and market sentiment terminology:

• Bullish (bull) means expecting prices to rise (optimistic about the market).

• Bearish (bear) means expecting prices to fall (pessimistic about the market).

The most recent AAII Investment Sentiment Survey shows the most bearish sentiment since early November 2023, which marked the end of that 10% correction.

Bearish sentiment has grown 13% in the prior two weeks, which is also rare. We saw that at the end of the 10% correction in November 2023, the regional banking crisis (remember Silicon Valley Bank, First Republic Bank, etc.) in March 2023 and then again in late September 2022 which was close to the bottom of that bear market.

In other words, when investors are this worried, a large fall from here would be quite rare and actually offers the potential of a move in the opposite direction. In the AAII survey above, you should grow cautious when there are too many bulls (green bar).

With nearly HALF of AAII Survey respondents bearish on stocks, it’s important to note that in past readings at these negative levels, it has often lead led to sharp rallies. The last three times the AAII survey got this bearish (negative) in the current bull market cycle, stocks never looked back.

Two research outlets that we at Sandbox follow closely, provided these recent notes:

1. DataTrek Research: Headlines scream, but stock prices yawn. That’s the current state of US equity markets, and history strongly suggests the tape is correct. The American economy has been resilient for +15 years, sustaining structural growth through a variety of shocks. Wall Street analysts have done a reasonable job of estimating earnings, and 2025 looks to follow that lead. It takes a genuinely novel catalyst to derail US stocks. While policy unpredictability certainly feels uncomfortable, it comes nowhere near that threshold. We remain bullish.

2. FundStrat Research: Bottom Line: Inflation Jitters, But No Panic. Despite hotter-than-expected CPI, investors are buying the dip, and markets remain constructive. The Fed’s reaction matters more than one month’s data, and so far, Powell has not signaled policy tightening. With earnings holding up and sentiment already cautious, we remain constructive on 2025.

In the end, remember that it’s impossible to predict, forecast or time the markets in the short-term. All of these historical data points and sentiment readings are merely guiding posts for investors. Make investment decisions that align with your financial plan, with your financial advisory team, rather than on emotion that the mainstream media is trying to stir. And please do not derail your long-term planning for short-term noise, or even for market pullbacks that will occur. The market will provide clues and ultimately show if these sentiment readings were accurate to follow.

For some great charts and perspective from The Sandbox Daily , see last week’s post that includes historical data on the frequency of market pullbacks and corrections, link below: