ASX investors on alert as bearish investor sentiment gauge spikes to GFC levels

As February draws to a close, a palpable nervousness has gripped investors. The source of the unease is arguably the unpredictable domestic and international policies of President Donald Trump in his second term, combined with fears of economic fallout from aggressive cutbacks spearheaded by the Department of Government Efficiency (“DOGE”).

The DOGE initiative, led by flamboyant billionaire Elon Musk, has already resulted in significant layoffs of federal workers and slashed public spending, raising concerns about a slowdown in the U.S. economy and potentially even a government shutdown. These developments have reverberated across global markets, creating substantial volatility amid record highs and concerns about valuations.

A window into investor minds

Major U.S. indices have shed 2-3% this week, while the local S&P/ASX 200 is down over 4% since its 8616 high set on February 14. It appears that sentiment is shifting quickly. We received some confirmation of how rapidly this shift is occurring in the latest AAII Sentiment Survey.

The American Association of Individual Investors (AAII) is an independent nonprofit investor association whose membership exceeds 160,000. Since 1987, AAII has published its Sentiment Survey, which offers markets what it describes as a “weekly pulse” on member sentiment.

The latest survey, covering the week ending February 26, 2025, paints a grim picture. Bearish Sentiment, which equates to expectations that stock prices will decline over the next six months, soared to 60.6%, up from 40.5% the previous week. The 20.1% jump marks the largest weekly increase since August 2019, bringing bearish sentiment to its highest level since September 2022.

To put this in context, AAII notes that only six other weeks in the survey’s 38-year history have recorded higher pessimism among its members, including periods tied to the 1990 recession, Iraq’s invasion of Kuwait, and during the depths of the Global Financial Crisis.

Last week’s spike, which follows a rise of over 25% since the start of the year, aligns with growing concerns among investors regarding U.S. and global economic growth. Evidence of these concerns was echoed in the Conference Board’s consumer confidence index – which last week posted its largest monthly drop since August 2021 – directly attributing the decline to growing unease over Trump’s policy agenda including tariffs and DOGE.

Bulls, not bears, going into hibernation…

It’s worth noting that the AAII Sentiment Survey also measures Bullish Sentiment, that is, confidence stock prices will rise over the next six months. This aspect of the survey dipped 9.8%, to 19.4%. This reading, the lowest since March 16, 2023 (19.2%), ranks among the 65 weakest in the survey’s history. It also falls well below the historical average of 37.5%, marking the seventh time in nine weeks that optimism has languished beneath this benchmark.

As a result of the bull-bear sentiment swings, AAII reports that the Bull-Bear Spread, a key metric of net sentiment, widened to a negative 41.2% – the most pessimistic reading since September 2022 and the fourth consecutive week in negative territory.

For completeness, it’s worth noting that the final component of the survey, Neutral Sentiment, which captures expectations of a flat market over the next six months, also declined, dropping 10.3% to 20.0%. This figure sits below the historical average of 31.5% – a threshold it has undershot for 32 of the past 34 weeks and marks the lowest neutral reading since September 29, 2022 (19.2%).

Time to panic?

AAII Sentiment Survey vs S&P 500 5-years. Source: AAII, Market Index (click here for full size image)

The chart above of the AAII Sentiment Survey versus the S&P 500 over the last 5 years is an excellent reference period because it captures two bear markets in a very short space of time. It is consistent with trends experienced over longer timeframes – bearish sentiment tends to grow into major market tops – but peaks at major market bottoms.

It could be argued that investors have generally been correct in growing more cautious into major market tops, but also that they perhaps weren’t cautious enough – or certainly not as cautious when compared to major market bottoms. Many investors were too complacent, therefore missing the turn from bull to bear, only to be too frightened at the bottom to do anything about it. 

The other interesting point to note from the chart is that the recent spike in Bearish Sentiment (the red line) is far more rapid than during the COVID-19 pandemic increase and prior to the 2022 bear market that was triggered by the Federal Reserve’s large and rapid interest rate increases. Investors are growing concerned at near-unprecedented levels.

Amidst growing consensus, where do you sit?

It is clear from the AAII Sentiment Survey that bearish sentiment is growing and bullish sentiment is evaporating at a historically rapid pace. Investors’ views are growing increasingly polarised towards stock prices, as fewer investors are sitting on the fence in the face of looming economic and policy risks. But, we have also seen that investors are not always perfect with their timing in predicting market tops.

So, where do you sit? Bullish or bearish? And what do you intend to do about it? There is no doubt that in the long run, stocks generally rise and deliver returns that are very competitive among alternative asset classes. But the short term can be very different. It is not uncommon for stocks to lose 10% (considered a correction) or even 20% or more (considered a bear market) in times of economic uncertainty.

Investors who can manage those downturns successfully will put themselves in a superior position to take advantage of the inevitable buy-the-dip opportunities that stock markets present every few years. The data shown here suggests it is likely now time to, at the very least, ratchet up the sensitivity of one’s investing risk radar a notch.

Let’s do our own, ASX version of the AAII Sentiment Survey – Have your say! 👇