What a difference a year makes, particularly through the lens of investor attitudes. Investors were enthusiastically bullish as we rang in 2018.  A sweeping corporate tax bill had just been signed into law representing fiscal stimulus to the tune of 5 per cent of GDP at a time when the unemployment rate was closing in on 4 per cent. Investor sentiment, alas, was a contrarian indicator, as the red ink of 2018 can affirm.

The American Association of Individual Investors (AAII) gauges investors’ attitudes by surveying their members weekly asking them if they’re bullish, bearish or neutral. While investor sentiment is more of a spice than a major ingredient when we at Cresset assemble our macro assessment of the markets, extreme attitudes, whether bellicosely bullish or bombastically bearish, get our attention. We compare bulls as a percentage of bulls and bears and calculate historical percentile rankings. It turns out that the S&P 500 1-year forward return is more than double, 13.8 per cent, when investor sentiment starts out in the bottom decile vs the top decile, 6.4%. Investor bullishness at the outset of 2018 was situated in the 98th percentile of its historical range.

Bullish investors have high expectations and, in a world in which market returns represent the intersection of expectations and reality, 2018 – thanks to a trade war between the world’s two largest economies and tightening central bank liquidity – fell far short of expectations. Now, investor attitudes have plunged. According to the most recent AAII data, investor bullishness has eroded to the 9th percentile of its historical range, after dipping to 2 per cent on December 14. Is New Year 2019’s pessimism setting up for a market rally? Perhaps. We note than 2016 kicked off with widespread investor pessimism. Bullishness dipped to 1 per cent on January 14 but the S&P 500 rallied that year.

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