So far this year, the Dow Jones industrial average has sunk more than 1,436 points, amounting to an 8% loss in stock market wealth. If you go back to the market’s highs last year, the Dow is now down nearly 13%, while the Standard & Poor’s 500 index is off nearly 12%.
Yet individual investors appear to be surprisingly calm. How can we tell? First, a new survey of of investors with at least $10,000 in their accounts, conducted between January 6 and 11 by the online broker E*Trade, found the following:
Investors are growing more bearish…
55% of self-directed investors described themselves as being “bearish”—meaning they believe the stock market is going to decline—up from 44% last summer.
… but a majority remain positive.
In total, 54% of investors think the market will either “stay basically where it is” or “rise” in the next three months. By contrast, only 23% expect a 5% drop and just 16% are bracing for a 16% decline.
Very few investors are forecasting armageddon.
Only 2% of respondents said they expect a 20% decline or greater.
And investors remain positive about the economy.
One third of investors describe the underlying economy as being “good” or “great” and another 47% describe it as “fair.” In all, only 20% describe the economy as being poor, which is important.
Why? First, it reduces the odds of a full-blown bear market, since equities foreshadow what’s to come in the economy six to nine months down the road. And even if the selling continues, a growing economy decreases the likelihood of a grisly crash. Major sell-offs that didn’t precede recessions have averaged losses of around 20%. That pales in comparison to the 50% or greater losses in the last two bear markets.
Meanwhile, a Jan. 14 survey of investor sentiment by the American Association of Individual Investors also reveals something interesting.
While bearishness is on the rise…
Right now, less than 18% of investors in this survey described themselves as being “bullish,” while more than 45% say they are “bearish”. The ratio of self-described bulls to bears has fallen to the lowest levels in history.
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…bears are not in the majority.
The AAII survey does something interesting. In addition to letting investors describe themselves as bullish or bearish, it gives respondents a third choice: “neutral.” If you add the number of “neutral” respondents to the bulls, about 55% of investors are bullish or neutral.
And that’s roughly the same percentage of neutral-plus-bullish investors as in March 2009, when this bull market began.