EXPERIENCED INVESTORS know that the stock market and the economy sometimes diverge. Early 2020 offered a stark example: Even as the economy was still contracting rapidly, stocks started bouncing back.
But right now, many areas of the stock market are doing about what you’d expect. After all the efforts by the Federal Reserve and Congress to prop up the economy over the past two years, rising inflation is front and center, along with rising interest rates. Shares of growth companies, seen as more sensitive to higher interest rates, are in severe decline. Meanwhile, commodities—after pulling back slightly in late March—are climbing once again.
With inflation soaring and the stock market spluttering, investors seem to be giving up hope. The weekly survey from the American Association of Individual Investors shows a nearly 30-year low in optimism.
Sentiment data released last week by CNBC tell a similar story. The network’s All-American Economic Survey found that just 28% of investors think it’s a good time to be in stocks. That’s the lowest figure in the survey’s 15-year history. Meanwhile, Bank of America’s Bull/Bear Indicator is flashing extreme bearishness right now.
All this despondency may be good news for long-term investors. When people are most frustrated by stocks and the overall economy, decent returns often follow. If you’re like many folks and nervous about where financial markets are headed next, consider that risk is usually highest when euphoria abounds. That was true in early 2021, when the junkiest of stocks were all the rage. The waning enthusiasm we’ve seen since then may be exactly what we needed.