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Sentiment Hits Two-Year Low, but Stocks Climb Wall of Worry

March 24, 2015
Sentiment Hits Two-Year Low, but Stocks Climb Wall of Worry

Are stocks still climbing a wall of worry? At least some measures of investor sentiment show market participants are questioning the soundness of their footing.

The “wall of worry” moniker describes a stock rally amid a bevy of concerning or even negative news.

The latest American Association of Individual Investors (AAII) Sentiment Survey revealed that optimism among its membership fell to a two-year low in its latest weekly survey period ended March 18. Around the same time, the S&P 500 (SPX) bounced from a nearly 4% early-year decline to once again challenge all-time highs.

The TD Ameritrade Investor Movement Index® (IMXSM) also hit a two-year low at 4.7 as of the end of February. The IMX is a proprietary, behavior-based index that tracks holdings/positions, trading activity, and other data from a sample of 6 million funded client accounts. The drop in optimism in the latest IMX reading shows that "a lot of people have dialed back. It's not that they are not investing—they are investing in lower-beta names like GE (GE), Exxon Mobil (XOM), Chevron (CVX)—more blue-chip types of stocks," said JJ Kinahan, chief strategist at TD Ameritrade.

FIGURE 1: DIVERGENCE. The TD Ameritrade Investor Movement Index® (IMXSM) hit a two-year low at 4.7 as of the end of February. It maintained a downward trend even as the S&P 500 (SPX) bounced. Source: TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Solid, Yes. But Strong Enough?

No doubt investors have been seeing conflicting economic signals lately. Sluggish inflation numbers and weak overall demand remain a weak link in the U.S. economic outlook. Year over year the personal consumption expenditure, the Fed's favored inflation gauge, gained only 1.3% through January. That stands well below the Fed's 2% target for inflation.

"Even though we are hitting all-time highs in the market and employment numbers are improving, we haven't seen supporting evidence from other economic numbers. People are getting jobs, but they aren't finding careers. We’re not seeing an uptick in the housing numbers that might be expected at this point in the recovery. Our recovery is strong, it’s just at a very, very slow pace. There is a lot in the world to be cautious about," said Kinahan.

Contrarian Take

Recent declines in sentiment may not be a sign for investors to run for the hills, especially when viewed from a contrarian perspective.

"If people continue to be less optimistic, commonly that is a good sign for the market because a market usually rises as people are fearful," said Ryan Campbell, content manager at Investools®. Pointing to the ongoing rise in U.S. stock prices in recent years, Campbell noted that "a lot of this rally is Fed driven. It’s hard to fight the Fed. Anybody who has been fighting the Fed for the last four to five years has been really sorry as the markets have continued to climb," he said.*

The most recent signals from the Fed suggest that the central bank remains in the slow lane when it comes to rate hikes. Official monetary policy rates remain at extremely accommodative levels near zero. Many analysts are now eyeing the September meeting for the first move toward higher rates, and that could mean a smaller number of overall rate hikes are in the cards for 2015. The Fed has reiterated that a shift to higher rates will be data dependent. What does this mean for investors?

Portfolio Allocation

Campbell underscored long-term investing themes. "Always stick to your plan. Don't get over-allocated into any one investment. Continue to rebalance. Maintain a risk profile that fits your life stage and risk tolerance," he said.

For the more active trading crowd, as rates remain low for now, a good question to ask is "how do you generate return? You might consider solid companies that pay consistent dividends," said Kinahan. "It's not that you shouldn't invest, but as things get more volatile, some will consider rotation into what historically has been a safer sector," he added.

We’ll Help with the Heavy Lifting

TD Ameritrade’s Trade Architect stock and options screeners can help you in your search to generate return. Log in to the Trade Architect platform and go to Ideas > S&P Options Screener > S&P Best 10 and Relative High Dividend Stocks.

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