Wall Street got the new month started on the right foot on Tuesday, as major market benchmarks continued their upward surge and retained much of their momentum from November. The Dow Jones Industrial Average (DJINDICES:^DJI) didn't quite gain enough to set a new all-time record high and in fact finished well below the 30,000 mark. However, the advances in the S&P 500 (SNPINDEX:^GSPC) and Nasdaq Composite (NASDAQINDEX:^IXIC) sufficed to set new high-water marks for the two much-followed indexes.
Today's stock market
|
Index |
Percentage Change |
Point Change |
|---|---|---|
|
Dow |
+0.63% |
+185 |
|
S&P 500 |
+1.13% |
+41 |
|
Nasdaq Composite |
+1.28% |
+156 |
Data source: Yahoo! Finance.
Market participants have proposed a number of explanations for the strong performance in stocks lately. Yet largely going unnoticed is a dramatic shift in the way that investors think about the stock market. The change in view certainly explains the gains, but it also raises some concerns for the near-term future.
Investors are finally convinced that the bull is back
Throughout much of 2020, ordinary investors missed out on the stock market's rebound from the March lows. Even as many individual stocks soared well beyond their best levels from before the beginning of the COVID-19 pandemic, most investors remained convinced that the other shoe was about to drop and send the stock market into another tailspin.
Image source: Getty Images.
You can see that sentiment by looking at the American Association of Individual Investors (AAII) and its weekly survey of its members' views on the stock market. Throughout July, August, and September, far more individual investors were bearish on the market than bullish -- even as stocks generally continued their long advance.
It was only in October that the number of bullish investors started to rise significantly. It finally climbed above the bearish sentiment levels by the AAII's Oct. 22 survey.
The presidential election was the turning point for individual investors. By Nov. 12, most of the votes had been counted, and a final result was reasonably certain. That week, the percentage of bullish investors hit nearly 56%, compared to just 25% bears. That 56% reading was the highest since January 2018 -- immediately after the biggest corporate tax cut in history prompted an amazing rally in stocks.
A warning sign?
The problem with bullish sentiment numbers from the AAII survey is that they tend to be a contrarian indicator. When individual investors are all-in on stocks, they don't have any more money to invest, and so the next move is more likely to be lower. When they're bearish on stocks, they tend to put money on the sidelines, and that gives them ammunition to jump in when prospects for the market improve.
The conditions that prevailed during much of 2020 are in fact much more common during bull markets. Investor sentiment tends to oscillate higher or lower from week to week, but it more commonly shows a balance between bullish and bearish investors. The resulting tension leaves stocks room to move higher.
After what's turned out to be a strong year, it's a reasonably safe prediction that at some point, the market will need to correct and move lower at least for a short period. Yet that shouldn't change your long-term investing strategy. Picking great stocks and holding them for the long run is still the best pathway to financial security -- regardless of whether you're optimistic about the market's near-term prospects or scared of an impending downturn.
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December 02, 2020 at 06:30AM
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