March and April were rollercoasters for the stock market and potential reasons why can be found on either side of the aisle. Positive or negative. Tariffs, of course, have played a big role in market volatility. Though we’re in a period of waiting (90-day pauses), there’s little doubt we’re out of the woods from a tariff and volatility standpoint. Instead of trying to explain the markets using any handful of points from the left, right, or center, we’ll instead review investor sentiment for a “narrative-agnostic view of things” with the help of Schwab’s Chief Investment Strategist, Liz Ann Sonders.
Investor sentiment is typically viewed as a contrarian indicator. The market movement was sharply lower in early April pushed the S&P 500 near bear market territory and “was enough to send many investor sentiment metrics we track into “extreme pessimism” territory. As is typically the case when that happens, it created fertile ground for a positive catalyst to help jolt stocks into the opposite direction. We’d argue that the 90-day “reciprocal” tariff pause, followed by the initiation of trade talks with some of our major partners, acted as that catalyst.”
“Arguably, the most popular attitudinal metric is the weekly Investor Sentiment Survey put out by the American Association of Individual Investors (AAII), which asks investors whether they are bullish, bearish, or neutral on the market looking out over the next six months. Looking at the spread between the share of bulls and bears, which you can see in the chart below, it collapsed swiftly in April (meaning bears outnumbered bulls) to a level consistent with the lows seen toward the end of the bear market in 2022.”
As the catalysts for positive market shocks Liz Ann mentioned materialized and began to compound, the S&P 500 shot up 19% and came back to being 0% year-to-date.
A final word from Liz Ann Sonders which we firmly echo. “Animal spirits and recent price action are still in bulls’ favor for now, so we wouldn’t be surprised to see a continued grind higher for stocks from here. Yet, given the unique nature of the current volatility backdrop, we also wouldn’t be surprised to see stocks struggle at the first hints of deteriorating hard data. Up until this point, the market has priced in a panic and subsequent reversal of the worst-case tariff outcome; but the next phase is digesting a backdrop of tariff rates that are both well into double digits and a constant moving target. We expect significant index-level volatility to persist.”
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