The path to happiness begins with low expectations. Cynical, maybe, but true often enough when it comes to life and markets.
The sudden break in the stock market last month and the anxious aftermath have certainly dimmed the public’s expectations for their investments nicely, focusing attention on the risks.
Many of those risks are always there, of course, but only when stocks fall apart to they get their due. What is commonly euphemized as “uncertainty” on Wall Street is the inherent ambiguity of the world, which is ever present but only gets widely noticed in a tougher tape.
Expectations for stocks over the next six months have dropped along with the indexes. The fresh weekly survey by the American Association of Individual Investors showed those expecting lower prices jumped 11.2 percentage points to 39.9%, while those anticipating gains fell to 28.1%.
This is close to a multi-year high in bearishness, though 40% were bearish on July 30 right before the market tanked, so this is far from a reliable contrarian indicator on its own.
Yale economist and Nobel Laureate Robert J. Shiller maintains a series of sentiment indexes, including the Crash Confidence Index and the Buy-on-Dips Confidence. The percentage of investors who recently were confident there would not be a market crash sank toward 30% - downcast but not despondent.
It should be noted that the public has lingering trauma from 2008, because not once this cycle has this confidence measure climbed to what were typical levels in the mid-2000s bull market.
And in terms of real-money evidence, retail investors have pulled their money out of equity and, especially, emerging markets funds at close to historic rates in recent weeks.
Notably, across negative feeling was higher four years ago near the panicky 2011 market low – a phase often used as a possible model for this year’s downturn. This makes sense, as the market itself fell nearly 20% then, versus 12.4% at its worst this time.
So one might say we’ve seen merely the “expected” reduction in public expectations, given the market realities.
Plenty of fear out there for a continued rebound to be the kind of consensus-confounding move the market likes to make. But not necessarily an obvious overreaction that makes more upside seem like a fat pitch.
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Analysts have cut away at corporate profit forecasts for the third quarter, though not as aggressively as one might expect. Factset says S&P 500 (^GSPC) companies are projected to show a 4.5% drop in earnings, down from an anticipated 1.5% dip on June 30.