Key Takeaway: Investor moods will change as prices fluctuate but they seemed to follow word with deed in May. The AAII asset allocation survey showed them lightening up (perhaps only briefly and modestly) on their equity exposure. By month-end, we had evidence that the $4.5 trillion in money market funds (more of a molehill than a mountain when adjusted for total market value) was being put to work in both stocks and bonds. Bearish investors are not so much disgruntled with stocks, but disgusted by the price action they have experienced this year. It didn’t take much of a move off the lows for optimism to start building again. Rallies that are initially despised (or at least viewed skeptically) are more likely to have staying power than those that are quickly embraced. Sentiment is at levels from which rallies tend to emerge - positioning, however, is not.
Sentiment Report Chart of the Week: Investors Take Some Action
AAII asset allocation data shows that investors trimmed their equity exposure last month. pulling back from 70% in April to 67% in May. Bond exposure moved up from 13% to 14% and cash increased to 19%. Two things are worth pointing out here:
This data is collected over the course of the month and heavy inflows into both equities and bonds over the past two weeks could indicate that the little that had been moved to the sidelines has already been put back to work.
Even with the reduction in equity exposure, there is a wide chasm between what investors are saying (represented by the Consumer Index) and what they are doing (AAII Asset Allocation). The Consumer Sentiment index dropped to its lowest level in a decade in May, equity exposure dropped to its lowest level late 2020. At the important sentiment turning points of the past (highlighted on the chart above), equity exposure averaged just 50%.
