AAII Sentiment Survey: Optimism Rebounds; Pessimism Stays Above Average

Posted on October 9, 2014 | AAII Survey

Optimism rebounded back above its historical average after having fallen by 6.8 percentage points between September 18 and October 1. Though bearish sentiment increased ever so slightly (0.1 percentage points), this is just the fourth time in the past 12 months that pessimism is above its historical average on back-to-back weeks.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded by 4.5 percentage points to 39.9%. This is the eighth week out of the past nine with optimism above its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 4.5 percentage points to 29.1%. The historical average is 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, edged up by a mere 0.1 percentage points to 31.0%. The historical average is 30.5%.

Both bullish and bearish sentiment are very close to their historical averages. This is occurring as stocks are experiencing both upward and downward volatility. Keeping some individual investors optimistic are the S&P 500’s overall upward momentum, earnings growth, sustained economic expansion and the Federal Reserve’s tapering of bond purchases. Keeping others cautious are worries about the possibility of a correction, prevailing valuations, geopolitical events, the pace of economic growth and Washington politics.

This week’s AAII Sentiment Survey:

  • Bullish: 39.9%, up 4.5 percentage points
  • Neutral: 29.1%, down 4.5 percentage points
  • Bearish: 31.0%, up 0.1 percentage points​

Historical averages:

  • Bullish: 39.0%
  • Neutral: 30.5%
  • Bearish: 30.5%

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.

Have Patience With Small-Cap Stocks

Posted on October 9, 2014 | Investor Update


It has not been a good year for small-cap stocks. As of yesterday’s close, the Russell 2000 index was down 4.78% year-to-date. In contrast, the larger-cap Russell 1000 index was up 7.72%. We’re seeing similar comparisons with other indexes as well. For example, the S&P SmallCap 600 was down 4.99%, whereas the S&P 500 index was up 6.52%. (Obviously, these numbers will be lower once data reflecting today’s decline is published.)

Valuations have been blamed as the reason why. Small-cap stocks were expensive relative to large-cap stocks. They still are. S&P Capital IQ calculates the SmallCap 600 as trading at 22.1 times trailing 12-month (TTM) earnings, versus 26.3 at the end of 2013. In contrast, the S&P 500 is trading at 16.8 times TTM earnings, versus 16.9 at the end of 2013. Arguably, in the background, other concerns (e.g., the tapering of bond purchases by the Federal Reserve, geopolitics, the length of the bull market, etc.) are also playing a role in causing small caps to lag.

This is not the first time small-cap stocks have underperformed large-cap stocks, and it likely won’t be the last time either. As John McDermott and Dana D’Auria discussed a few months ago in the AAII Journal, small-cap stocks only beat large-cap stocks on an annual basis about 50% of the time between 1926 and December 2013. The size premium realized by small-cap stocks comes from their higher volatility. Small-company stocks experienced a standard deviation of 32.3% between 1926 and 2013. Large-company stocks had a lower standard deviation of 20.2%, according to the 2014 Ibbotson SBBI Classic Yearbook. (Standard deviation measures the range of values above and below average for a set of data. Larger values indicate greater variability.)

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Misunderstanding Variable Universal Life Can Lead to Adverse Consequences

Posted on October 8, 2014 | Financial Planning

I have been skeptical of variable universal life insurance policies (VULs) since they became popular enough to show up on my radar screen in the late 1980s.

In the beginning my skepticism was just instinct. Then experience proved that it wasn’t misplaced. Though I have been consistent in my published columns, I continue to refine how we should think about and treat variable universal life. This article is probably my bottom line on this type of insurance policy.

Almost all clients view variable universal life as similar to whole life and universal life, buying these policies for family protection or associated with estate planning. But as we will see, variable universal life policies are very different.

Virtually all variable universal life policies I have reviewed have these characteristics: a.) illustrated (represented based on hypothetical assumptions) to have level death benefits from the day purchased until death; b.) invested in risky sub-accounts [primarily stocks]; and c.) a premium that the client believes is his or her “policy’s premium.” Buyers of variable universal life are very loyal to their premium. The premium is based on an assumed constant investment yield that the selling agent selects during the sales process, which they justify based on some construct of historical data. The constant investment yield is mandated by regulators.

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Sell OF THE WEEK 10/8/2014

Posted on October 8, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Norfolk Southern Corp. (NSC) is his “Sell of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Sell of the week

Real Returns Favor Holding Stocks

Posted on October 7, 2014 | AAII Journal

Charles Rotblut (CR): You have a reputation for being bullish on the stock market, but from reading “Stocks for the Long Run,” it sounds like you’re more focused on the ability of stocks to prevent the loss of purchasing power than making a call on the direction of the market. Is that correct?

Jeremy Siegel (JS): My book emphasizes that the long-run return on stocks is between 6.5% and 7% per year after inflation (Figure 1). This return has been very stable in the long run. Over time stocks are good hedges against inflation, so they keep up with inflation and purchasing power, but even aside from that their returns are excellent compared to fixed-income assets. They dominate fixed-income assets, and particularly in today’s low interest rate environment I think the margin by which stocks will outperform bonds is even greater than it historically has been.

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Figure 1. Total Returns on U.S. Stocks, Bonds,
Bills, Gold and the Dollar, 1802–2013


Posted on October 7, 2014 | Weekly Features

This week’s AAII Weekly Features has been updated.
View this week’s Top AAII Articles, Featured Stock Screen and Member Question.

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BUY OF THE WEEK 10/7/2014

Posted on October 7, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Raymond James Financial (RJF) is his “Buy of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Buy of the week

The Steady Hand Wins the Day

Posted on October 3, 2014 | Stock Superstars Report

The market, as measured by the Dow Jones industrial average, is down around 100 points for the week, which is just noise in the investment world. Apart from the excitement surrounding the iPhone 6 and the “panic” surrounding a case of ebola in Texas, the week was relatively quiet. While the ebola “panic” generated plenty of headlines…

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DI Portfolio Changes, Plus the October Monthly Report

Posted on October 3, 2014 | Dividend Investing

We are making our first changes to the DI portfolio since June. Details can be found in the October Monthly Report, which is now available on the DI website, but here is a quick summary.

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Is Your Diversified Portfolio Truly Diversified?

Posted on October 2, 2014 | Computerized Investing

Mutual funds—and more recently, exchange-traded funds (ETFs)—have offered safety and diversification by allowing individual investors to buy shares in many companies in order to spread risk. It is important for investors to understand what role they play and what role the fund managers’ play in ensuring proper diversification of their portfolio. Additionally, investors need to understand when fund companies fail on proper diversification, how that results in improper diversification and what impact that could have on their portfolios. We highlight what diversification is and why it is important, then discuss why an appearance of being diversified may not mean that your portfolio is truly diversified. Finally, we identify ways that fund managers and investors can damage their portfolio diversification.

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