Bears are Back

January 23, 2025

Phew. For a shortened trading week, there sure has been a lot of news as the new administration arrived in Washington. There has been no shortage of coverage on those topics so I’m going to talk about something else this week that plays a pretty important role in investing and markets – sentiment.

Sentiment is defined as: An attitude toward something; regard; opinion. a mental feeling; emotion

As it relates to investing, how investors feel about markets can give us sightline regarding to the current market mood but perhaps more importantly, often tells us about what might come next. Markets also love jargon so instead of using coming sentiment terms (happy/sad, positive/negative), they instead use the terms bears (negative outlook) and bulls (positive outlook).

One of the most popular surveys of investor sentiment is the AAII Sentiment Survey. The survey focuses on individual investors and asks for their outlook for the market over the next six months.

Looking back at the data (the survey began in 1987), it’s evident that markets tend to do better in the coming weeks/months when investors are bearish. Yes you read that right. Markets do better moving forward when investors have negative perceptions of the same time period. Why would that be?

Nothing against individual investors (I am included in that group, as are you!), but they are emotional beings. When news or readily available market data trends negative, or if the markets have been volatile or moving downward, investor sentiment tends to be poor. On the flip side, when markets are going up every day and there’s an almost euphoric feeling, individual investors tend to follow the herd and feel strongly positive emotions.

Feelings are one thing – actual market mechanisms are another. For markets, starting points matter. And many times, after a downturn or a series of negative metrics, the starting point is lower and forward returns tend to be higher as a result. The opposite is true after a meteoric run in markets – it becomes harder and harder to outpace that starting point (at least not in a straight line) and a near-term pull back has a higher likelihood.

What does sentiment tell us now? The most recent survey showed that for the first time since November 2023, there are more bears than bulls (ie: more negative sentiment that positive sentiment)

And as you can see in the chart below, when the bears take control, it has historically marked a near-term bottom for equities

We all know that history doesn’t repeat but if it does in fact rhyme, today’s negative rhetoric (fears of new administration, fears over valuations, fears of market at all time highs, etc) may actually prove to be good news for investors. Go figure!

Onward we go,

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