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AAII Sentiment Survey: Fiscal Cliff Weighs on Investors to End the Year

For the week ending December 26, 2012, bullish sentiment slipped a bit off of its near-2012 high, as investors waited to see if Congress and the president were going to come to some agreement on spending and taxes to avoid the fiscal cliff. However, bearish sentiment rose for the first time in four weeks.

While a last-minute agreement was reached late New Year’s Eve, investors had little time to digest its ramifications for this week’s survey. As a result, bullish sentiment fell to its lowest level in six weeks in the latest AAII Sentiment Survey. Bearish sentiment continued its rise.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 5.7 percentage points to 38.7%. This is the lowest level of optimism registered by our survey since November 22, 2012. It is also the first time in six weeks that bullish sentiment fell below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, dipped 0.3 percentage points to 25.1%. This marked the 12th consecutive week that neutral sentiment was below its historical average of 30.6%.Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 6.0 percentage points to 36.2%. This is the highest level of pessimism registered by our survey since November 22, 2012. After a three-week departure, bearish sentiment is back above its historical average of 30.6%.

Looking back on 2012, bullish sentiment peaked at 51.6% on February 9, the only time during the year the figure was above 50% and the first time since February 3, 2011. Bullishness reached a low of 22.2% for the year on July 19. This was the lowest bullish reading since August 26, 2010, when it fell to 20.7%. The highest bearish reading for 2012 was 48.8% on November 15. Bearishness bottomed out at 17.2% on January 12.

While the market reacted positively on the first trading day following the fiscal cliff agreement, the bill was a stop-gap measure, with negotiations related to spending cuts and the debt ceiling still to come. The bill will shield millions of middle-class taxpayers from tax increases that were set to go into effect at the beginning of 2013. However, it also will let rates rise on wages and investment profits for households earning more than $450,000 a year. The bill will also delay for two months automatic cuts to the Pentagon and other agencies that had been set to take effect January 1, 2013.

The special question we posed to AAII members over the last two weeks asked which industries or sectors they like right now. Of the 249 responses, a little over 17% of respondents said oil/energy; just under 17% like health care, which includes drugs, pharmaceuticals and biotech; nearly 16% favor financials; 14.5% said they prefer construction, homebuilders, housing and real estate; and almost 13% favor technology. A common theme among respondents was the fiscal cliff and the impact any resolution would have on the various sectors and the overall market.

This week’s AAII Sentiment Survey results:

Bullish: 38.7%, down 5.7 percentage points
Neutral: 25.1%, down 0.3 percentage points
Bearish: 36.2%, up 6.0 percentage points

Historical averages:

Bullish: 39.0%
Neutral: 30.6%
Bearish: 30.6%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat, or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.) The survey and its results are available online at: http://www.aaii.com/sentimentsurvey