by Denise Chisholm, Director of Quantitative Market Strategy, Fidelity Investments
There are plenty of ways to measure sentiment right now, and a handful are already flashing what you’d call “bullish” conditions - especially those tied to flows or more institutional positioning. But one measure, capturing a much broader swath of market participants, has remained stubbornly pessimistic. The AAII survey, which tracks individual investors, is still sitting in the bottom decile of its history. It’s a useful indicator not only for its long track record but because it captures behavioral tendencies like loss aversion and recency bias that contribute to retail positioning at turning points.
Historically, pessimism like this is constructive: the more bearish the survey, the stronger forward returns have tended to be. What’s unusual this time is the coexistence of deeply negative sentiment with strong market performance. Since the late 1980s, there have only been nine instances where the market posted gains of this magnitude alongside sentiment this poor. You might expect that to weaken the signal - but if anything, it’s strengthened it. In each case, markets were higher by double digits over the following year. Even in broader samples, when sentiment is this depressed and the market has already been better than average, forward returns don’t just improve - they have roughly doubled, averaging just over 20%, with higher hit rates across nearly every quartile and decile. So yes, sentiment is different this time – and that looks more like a feature than a bug.
Just as important as the level of sentiment, though, is its persistence - and that’s where this cycle really is “different this time.” It’s been defined by repeated, sharp resets in sentiment, almost as if investors are still anchored to the speed and severity of the last downturn. The result is an unusually long-lasting undercurrent of skepticism. By this measure, bearish sentiment has spent more than 60% of the last 18 months in its weakest quartile - worse than what we saw through the 1990 and 2000 recessions, despite no actual recession materializing. In fact, the entire five-year period since the 2020 recession has been dominated by below-average sentiment readings - a first for the series.
Statistically, this persistence matters even more than the level. The longer sentiment stays depressed, the stronger future returns have tended to be. There are no guarantees in investing, but here’s some perspective: When investors have already spent this much time in a state of worry, markets have always been higher one year later. It’s a reminder that this rally hasn’t been driven by exuberance - it’s one many have been reluctant to believe. And that may be the most important point: even after the gains we’ve seen, there’s still a meaningful wall of worry in place - and historically, that’s exactly the kind of backdrop bull markets thrive on.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
The AAII Investor Sentiment Survey is a weekly survey conducted by the American Association of Individual Investors. Participants are asked: Do you feel the direction of the stock market over the next six months will be up (bullish), no change (neutral) or down (bearish)?
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