Investors Match Word With Deed

Elevated optimism accompanies expanding exposure to equities - seeing the crowd reverse at this extreme is likely to be more of a process than an event.

Key Takeaway: Historically high optimism is following a period of persistent pessimism. It takes bulls to have a bull market, and as long as price and breadth trends remain strong, near-term sentiment risks are likely to be mitigated. Longer term, however, upside progress can be challenging when investors are all in on stocks.

The latest data from Investors Intelligence shows the most optimism and the least pessimism since the summer of 2021.

Consensus bullish sentiment remains as high as it has been in the past two decades.

Through last week, the AAII sentiment survey had bulls outnumbering bears for 17 weeks in a row. After the persistent pessimism of the past few years, this is now one of the longest stretches of sustained optimism in the past decade-and-a-half.

Zooming out can provide additional context for the current sentiment backdrop. We are moving away from the most persistent pessimism ever recorded in the AAII survey. While concerns about excessive optimism are in the forefront right now, stocks have tended to flourish when persistent pessimism faded in the past. Needing bulls to have a bull market is not just a mantra - it’s a reality.

For as happy as investors are about stock market strength, the political mood is more dour. We are heading into a unique election season, but it’s worth noting that no incumbent president has ever been re-elected with an approval rating in the 30’s.

The near-term risks associated with excessive optimism are mitigated by our Bull Market Behavior Checklist that shows price and breadth trends remaining a powerful tailwind for stocks in this environment. That doesn’t prevent optimism-associated hiccups from emerging but it does suggest that bad days in the market are unlikely to turn into bad weeks.

From an asset allocation perspective, elevated exposure to equities and a lack of household liquidity are persistent secular headwinds.