Retail investor pessimism has surged to its highest level in two and a half years, and the decline in U.S. stocks may not have stopped yet
The bearish sentiment among retail investors in the U.S. stock market has surged to its highest level in two and a half years, with the proportion of investors believing the market will decline significantly in the next six months jumping from 40.5% to 60.6%. The AAII survey shows that the bullish proportion has dropped to 19.4%, widening the gap between bearish and bullish sentiment to 41.2%. Technology stocks have performed poorly, with the NASDAQ Composite Index down 1.2% year-to-date
According to the latest statistics from the American Association of Individual Investors (AAII), as market sentiment regarding the U.S. economy falling into "recession" or "stagflation" has significantly intensified, bearish sentiment among U.S. retail investors has soared to its highest level in two and a half years. Technology stocks and momentum-based speculative trading have shown notable vulnerability. The AAII survey data indicates that in the week ending February 26, the proportion of bearish investors (those who believe the market will decline significantly in the next six months) jumped from 40.5% the previous week to 60.6%, compared to a historical average bearish ratio of only 31%.
The AAII survey data also shows that the bullish ratio dropped sharply from 29.2% to 19.4%. The gap between bullish and bearish ratios widened to 41.2% (severely leaning bearish), compared to just 11.3% the previous week.
U.S. retail investors' bearish sentiment towards the stock market has not been this strong since September 2022, when the bearish ratio reached as high as 60.87%. In 2022, the S&P 500 index fell 25% from January to October, entering a bear market and recording the worst performance in the first half since 1970. To find such strong bearish sentiment earlier, one must go back to the financial crisis period—where the bearish ratio in March 2009 once reached as high as 70.27%.
The 41.2% gap leaning towards bearish sentiment is the highest since September 2022 (43.1%), with the previous higher pessimistic level being 51.4% in March 2009.
As Chinese and European stock markets have rebounded significantly, the U.S. stock market has recently experienced a notable correction, with the S&P 500 index down 3% from recent highs, but still up 1.3% year-to-date. The Nasdaq Composite Index, which focuses on technology stocks, presents a different picture, as the "seven giants" with high weight have performed poorly this year, with the index dropping over 5% in the last five trading days and down 1.2% year-to-date. More and more investors are worried about a bear market sell-off similar to the "dot-com bubble burst."
The U.S. bond market may hold clues related to the prevailing pessimistic sentiment. The yield on the 10-year U.S. Treasury bond has fallen from nearly 4.8% in January to around 4.3%. Given the rising inflation expectations, the downward trajectory of U.S. Treasury yields seems more like a reflection of pessimistic expectations for U.S. economic growth, potentially bringing the topic of a U.S. economic recession back into focus.
The latest Consumer Confidence Index released by the Conference Board has fallen below 80 (which typically signals economic trouble), but as indicated by the inverted U.S. Treasury yield curve, such signals are far from guaranteed.
Typical recession warning signals are flashing in the U.S. Treasury market—the yield on the 10-year U.S. Treasury bond is lower than that of the 3-month U.S. Treasury bond, known as an inverted yield curve. Over the past few decades, this warning signal has had a reliable record in predicting economic recessions (12-18 months after the signal appears), but it does not guarantee a recession will occur Market pessimism regarding stagflation has recently intensified, with both January CPI and PPI exceeding expectations. Long-term inflation expectations among American consumers have even risen to the highest level in nearly 30 years. The latest inflation expectations released by the University of Michigan for February show that the 5-year to 10-year inflation expectation among American consumers has reached 3.5%, marking the largest month-on-month increase since May 2021 and the highest level since 1995. Respondents are generally concerned that Trump's tariff increases will lead to rising prices.
The U.S. Composite PMI fell from 52.7 in January to 50.4, hitting a new low in 17 months. More pessimistic data indicates that the massive service sector activity, crucial for the U.S. economy, has contracted for the first time in over two years, with the service sector PMI preliminary value at 49.7, entering the contraction zone and significantly lower than January's 52.9, marking a new low since January 2023. These are all core logic points for the recent significant rise in expectations of "stagflation" in the U.S. economy