Why Investors Are More Pessimistic About Stocks Now Than Recent Years

Summary

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WSJ Your Money Briefing

Episode: Why Investors Are More Pessimistic About Stocks Now Than Recent Years
Date: February 24, 2025
Host: Mariana Aspuru
Guest: Hannah Aaron Lange (Wall Street Journal reporter)

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Overview

This episode explores why investor sentiment toward stocks has grown more pessimistic in early 2025 compared to recent years. Host Mariana Aspuru and WSJ reporter Hannah Aaron Lange dig into causes behind the gloom, what the data is showing, the role of current economic and policy uncertainties, and how individual investors are responding to this environment. The episode aims to help listeners understand the mood in the markets and how to thoughtfully assess their own financial positions in uncertain times.

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Key Discussion Points & Insights

Investor Sentiment Hits Lows Not Seen Since 2023

• Bearishness at Recent Highs:
  • According to the American Association of Individual Investors (AAII) weekly survey, "bearishness or investors who expect stock prices to go down shot up to 47.3%, which was the highest level in a while since 2023."
    — Hannah Aaron Lange [02:06]
• The mood among investors is described as wary but not outright negative on the stock market as a whole.

Contributing Factors to Pessimism

• Tech Route and Market Confidence:
  • A "deep-seek tech rout in January" especially affected AI stocks, shaking overall market confidence.
    — Hannah Aaron Lange [02:35]
• Stubborn Inflation:
  • Persistently high inflation is raising doubts about the Federal Reserve's timetable for possible rate cuts.
• Trump Administration Policy Uncertainties:
  • Investors are reacting to "a blizzard of headlines coming out of the Trump administration on immigration, on trade policy, on reshaping the federal workforce" which adds layers of uncertainty.
• Quote:
  • "It's a reflection of just a lot of uncertainties that are floating around right now...and investors are still digesting all of that."
    — Hannah Aaron Lange [00:53, 02:35]

How Investors Are Responding

• Shifts in Investment Behavior:
  • There's been a "pause or even a pullback in the money that investors are pouring into stock funds," with many moving money to "value and dividend focused stock funds" or holding onto more cash, signaling more cautious approaches.
    — Hannah Aaron Lange [03:26]
• Many are in a "wait and see" mode, choosing not to make drastic moves but also not leaning into risky bets.

Tariffs and Policy Impact

• Tariff Announcements Create Additional Uncertainty:
  • "When the first kind of large announcement about tariffs came out of the Trump administration about Mexico and Canada, that really rattled markets... But it left a lot of investors wondering where this policy would go from here."
    — Hannah Aaron Lange [04:16]
• The unpredictability of trade policy is a major source of investor unease.

Interest Rate Expectations Shift

• Fed Rate Cuts: Doubts and Delays:
  • "Investors and economists had expected about two or three rate cuts from the Federal Reserve over the course of 2025."
    — Hannah Aaron Lange [04:54]
  • A warmer than expected CPI (inflation) report along with uncertainty over new federal policies has cast doubt on whether these rate cuts will actually happen, when, and how significant they'll be.

Is This Sentiment All Bad?

• Pessimism as a Contrarian Indicator:
  • "Some investors use the AAI survey as a contrarian indicator, meaning they'll sell when bullish sentiment is high or buy when bearish sentiment goes up."
    — Hannah Aaron Lange [06:01]
• Despite current caution, "I don't think bullishness has completely disappeared and I don't think investors have fully turned their back on the stock market."

What’s Next & Practical Takeaways

• Attention on Economic Reports:
  • Data points like jobs, inflation, and especially corporate earnings this season will be watched very closely for signs about whether current valuations are justified.
• Don’t Overreact, But Reevaluate:
  • "I wouldn't take this as a sign to completely rearrange your whole portfolio, but maybe this is an opportunity to look at some of the data that's out there and reevaluate how comfortable you are with your current allocation."
    — Hannah Aaron Lange [07:35]
• Memorable Summary:
  • Gut check your own comfort level: "A gut check is a good way to put it."
    — Hannah Aaron Lange [08:04]

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Notable Quotes & Memorable Moments

• On Market Uncertainty:
  "It's a reflection of just a lot of uncertainties that are floating around right now, and investors are still digesting all of that and trying to figure out what will end up having a durable impact on American companies and markets."
  — Hannah Aaron Lange [00:53, 02:35]

• On Investor Behavior:
  "In a ways, this could just look like pressing pause."
  — Hannah Aaron Lange [03:26]

• On Rate Cut Expectations:
  "There’s now some doubt being cast there as well in terms of when those [rate cuts] will happen, how large they might be."
  — Hannah Aaron Lange [04:54]

• On Using Pessimism Strategically:
  "Some investors use the AAI survey as a contrarian indicator, meaning they'll sell when bullish sentiment is high or buy when bearish sentiment goes up."
  — Hannah Aaron Lange [06:01]

• Listener's Takeaway:
  "I wouldn't take this as a sign to completely rearrange your whole portfolio, but ... reevaluate how comfortable you are with your current allocation, given some of these risks we’ve discussed."
  — Hannah Aaron Lange [07:35]

• On Reassessing Strategy:
  "Gut check is a good way to put it."
  — Hannah Aaron Lange [08:04]

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Timestamps for Important Segments

• 00:33 — Episode intro and framing of increased market pessimism.
• 02:06 — Data on investor bearishness and the AAII survey explained.
• 02:35 — Breakdown of reasons behind negative sentiment: tech rout, inflation, political headlines.
• 03:26 — How money is moving: investor responses and shifts in holdings.
• 04:16 — Uncertainty from Trump's tariff and trade policies.
• 04:54 — Federal Reserve rate cut expectations and doubts.
• 06:01 — Using sentiment data as a contrarian signal.
• 07:35 — Advice on reassessing, not overhauling, investment strategies.
• 08:04 — Gut check moment and episode wrap up.

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This episode offers a snapshot of a market at a crossroads, with investors cautious but not in full retreat. The focus remains on monitoring developments, staying flexible, and making measured, informed decisions in a changing environment.

Transcript

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[Mariana Aspuru]

Here's your money briefing for Monday, February 24th. I'm Mariana Aspuru for the Wall Street Journal. Trade war threats, stubborn inflation and dwindling expectations for additional interest rate cuts have turned some investors bearish in 2025.

[Hannah Aaron Lange]

It's a reflection of just a lot of uncertainties that are floating around right now, and investors are still digesting all of that and trying to fig what will end up having a durable impact on American companies and markets.

[Mariana Aspuru]

We'll talk with Wall Street Journal reporter Hannah Aaron Lange about how investors can navigate this wait and see period. That's after the break.

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[Mariana Aspuru]

Investors haven't felt this pessimistic about the stock market since 2023. So where does it go from here? Wall Street Journal reporter Hannah Aaron Lange joins me. Hannah, when we talk about individual investor sentiment, what do the numbers tell us?

[Hannah Aaron Lange]

The American association of Individual Investors does this survey each week where they ask investors whether they expect stock prices to go up or go down over the next six months, and they report the level of bearishness and bullishness. Earlier this month, we actually saw bearishness or investors who expect stock prices to go down shoot up to 47.3%, which was the highest level in a while since 2023.

[Mariana Aspuru]

And what are the main factors contributing to this gloom?

[Hannah Aaron Lange]

It's interesting. I mean, I don't think that we should interpret this result as investors going totally sour on the stock market. It's a reflection of just a lot of uncertainties that are floating around right now. We had this deep seek tech route in January that shook confidence in some of those leading artificial intelligence stocks. We've had persistently stubborn inflation. It's raising questions about the time and size of potential interest rate cuts. And we've had this blizzard of headlines coming out of the Trump administration on immigration, on trade policy, on reshaping the federal workforce. And investors are still digesting all of that and trying to figure out what will end up having a durable impact on American companies and markets.

[Mariana Aspuru]

Yeah. How does that uncertainty in the economy manifest in the stock market? Like, what do we see investors do here?

[Hannah Aaron Lange]

One thing we've seen is a pause or even a pullback in the money that investors are pouring into stock funds. And we saw a lot of dollars flow into equity funds in the last two months of 2024. And when it comes to individual investors, I spoke with a few of them for this article. And this can look like moving some funds out of growth focused stocks into maybe value and dividend focused stock funds, you know, more cautious picks, for example. And I spoke to another investor who was planning on just to hold onto some more cash. And in a ways, this could just look like pressing pause.

[Mariana Aspuru]

I want to dive into one of the things you mentioned in your story, which is the possible impact of tariffs by President Trump, which some economists say could make the market worse. How is this influencing investors?

[Hannah Aaron Lange]

This is a source of a lot of uncertainty for investors right now. When the first kind of large announcement about tariffs came out of the Trump administration about Mexico and Canada, that really rattled markets at those tariffs got delayed and markets sort of got their footing again. But it left a lot of investors wondering where this policy would go from here.

[Mariana Aspuru]

And another factor contributing to this wait and see as you're describing it, is that we haven't seen strong indicators from the Federal Reserve of any more rate cuts soon. How does that shift investor thinking?

[Hannah Aaron Lange]

Investors and economists had expected about two or three rate cuts from the Federal Reserve over the course of 2025. And we recently saw this kind of warmer than CPI report that cast some doubt on that. And there's also concern from economists that some of the policies that Trump is proposing, possibly limiting the labor supply through immigration enforcement or implementing some of these tariffs, could be inflationary in nature, which would factor into the Federal Reserve's decision on whether or not to cut interest rates. Once again. It's difficult to tell what will stick here, but the 2 to 3 rate cuts that folks have been expecting, there's now some doubt being cast there as well in terms of when those will happen, how large they might be, and if investors are going to end up getting what they expected and all of.

[Mariana Aspuru]

This uncertainty, hate to throw the word again, uncertainty, but all of this in the market is leading to, we were talking about bearishness, people not really having a very optimistic outlook right now. Is this pessimism a bad sign?

[Hannah Aaron Lange]

So I wouldn't say that rising pessimism is always a bad sign. Some investors use the AAI survey as a contrarian indicator, meaning they'll sell when bullish sentiment is high or buy when bearish sentiment goes up. The way I've heard this moment described by many analysts and investors is we're in wait and see mode. This is all to say I don't think bullishness has completely disappeared and I don't think investors have fully turned their back on the stock market. And there are pieces of the market that investors are still very bullish on. But I think in general, there's a lot of folks asking a lot of questions and maybe in a bit of a holding pattern as they see where the economy and markets go more generally going forward.

[Mariana Aspuru]

How could this gloomy, pessimistic outlook affect the broader market?

[Hannah Aaron Lange]

It's going to place a certain amount of attention or pressure, as I mentioned, on things like economics reports, the jobs report, inflation report. I also think that as we see Trump's policy agenda evolve, it will take some time, but as we see which impacts will last and how they're showing up in the data, that could determine which way investor sentiment ultimately leans. In addition to that, stock prices are really high right now and valuations have have been elevated for quite a while in the coming earnings season. We'll see. Focus on those reports. Are these valuations justified? Which way will the market eventually go as a result of all these questions that are still up in the air? I wouldn't take this as a sign to completely rearrange your whole portfolio, but, you know, maybe this is an opportunity to look at some of the data that's out there and reevaluate how comfortable you are with your current allocation, given some of these risks that we've discussed.

[Mariana Aspuru]

Kind of taking a gut check. Where am I at?

[Hannah Aaron Lange]

Yeah, a gut check is a good way to put it.

[Mariana Aspuru]

That's Wall Street Journal reporter Hannah Aaron Lange. And that's it for your Money briefing. I'm Ariana Aspuru for the Wall Street Journal. This episode was produced by me with supervising producer Melanie Roy. Thanks for listening.

[Hannah Aaron Lange]

Foreign.

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