During the recent pullback, sentiment went from very bullish to very bearish very quickly. Surprisingly, the S&P 500 (SPX) fell only 10%. Still, we believe certain factors led to this quick change in investor opinions, writes John Eade, president of Argus Research.
The decline was rapid and started at all-time highs. Rapid declines generally elicit a quick elevation in fear. In addition, the stocks that were hit the hardest were all strong performers, and investors often load up on the high-momentum names.
The stock market was in one of those perfect scenarios late last year and early this year, and sentiment was quite bullish. But one must be careful when everything seems perfect. Earnings growth was strong, the economy was growing, inflation had calmed, and we had a new administration that was pro-growth.
But tariff talk quickly put an end to the bullish hysteria, this as investors worried about higher prices, slower growth, and even a recession. Many on Wall Street immediately cut bullish targets, and the investment mood took a 360-degree turn.
What really concerned investors was the fact that there was (and still is) great uncertainty about what tariffs will go into effect, what the broader implications will be, and if there will be retaliatory tariff actions against the US.
The AAII survey flipped to levels seen during the 2022 bear market, with bears hitting 61% and bulls dropping to 19%. Strangely, the NAAIM Exposure Index did not react quickly to the decline and has fallen only to 58% exposure. During the 2023 pullback, exposure hit 25%. During 2022, it fell to 13%.
