Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 3.9 percentage points to 37.0%. Even with the drop, neutral sentiment is the expectation that is above its average of 31.5% for the 33rd time in 34 weeks.

The killing of Iranian general Qasem Soleimani likely influenced this week’s results. Several respondents brought up the conflict with Iran and tensions in the Middle East. Also affecting sentiment are the trade agreement between the U.S. and China, Washington politics, earnings growth, the economy, valuations and the stock market’s recent record highs.

This week’s special question asked AAII members: what you think will most influence the direction of stock prices in 2020?

Approximately 39% of respondents believe that geopolitical events will have the most influence on stock prices in 2020.

Individual investors have a lot of opinions based on news:

Unsurprisingly, the ongoing conflicts with Iran and China are named specifically. Domestic politics are also named by many respondents, with 26% stating that the outcome of the November elections will most likely influence the market. Additionally, 18% of respondents from this survey believe that earnings performance will sway the stock market and 17% say that the Federal Reserve’s policy and a low-interest-rate environment will have the biggest influence on how the stock market will move in 2020.”

Here is a sampling of the responses:

“The economy and earnings. And maybe an end to some of the trade wars.”

“The Fed will need to continue to lower rates and will probably need to continue its easing to maintain liquidity in overnight lending.”

“Strong business cycle in the U.S. and better trade agreements with China.”

“Earnings versus forecasts.”

“Conflict in the Persian Gulf and the 2020 election will increase uncertainty.”

In my opinion, these individual investors focus on the wrong things. The direction, momentum, and volatility of the price trend are all the matters. The direction of the price trend is the final arbiter. 

Is the AAII Sentiment Survey a Contrarian Indicator?

To learn more about the survey and the opinion of Charles Rotblut, who is vice president at AAII and editor of the AAII Journal on the matter, read the article by the same name: Is the AAII Sentiment Survey a Contrarian Indicator? 

Here are his conclusions in sentiment insights and as its role as a potential contrarian indicator for market direction.

“As the data shows, extraordinarily low levels of optimism have consistently preceded larger-than-average six- and 12-month gains in the S&P 500.”

It goes on to add:

“Sentiment is not a flawless contrarian indicator, however. Though unusual, bullish and bearish sentiment readings above or below one standard deviation from their historical average have a mixed record of signaling market direction. Extraordinarily high bullish sentiment and extraordinarily low bearish sentiment (two standard deviations away from the average) have generally worked well, with the exception of two notable periods.”

“It will be many years before we know whether the periods of 2003–2004 and November 2007–February 2009 were mere blemishes on the survey’s record as a contrarian indicator or a sign that both optimism and pessimism can remain at high levels for an extended period of time. I tend to think the latter will be the case, given long-term market history.”