As the market pulled back from its January gains, individual investors became increasingly bearish. The AAII Investor Sentiment Survey, which gauges individual investors’ expectations for the market over the next six months, has been conducted since 1987. Over that time, there have been 11 instances where bearish sentiment exceeded bullish sentiment by 40% or more. The most recent survey at the end of February marked the 11th occurrence of this extreme bearish sentiment.
(Source: FundStrat)
Historically, high bearish sentiment has been a strong contrarian indicator for market performance. In the previous 10 instances where bearish sentiment exceeded bullish sentiment by 40% or more, the market was positive 70% of the time over the following three months and 90% of the time over six and twelve months.
Why does sentiment matter? Because markets are driven by expectations—what is or isn’t already priced in. When optimism is high, companies must deliver exceptional results to surpass investor expectations. Conversely, when pessimism dominates, markets can rally simply on outcomes that are “less bad” than feared.
Negative GDP Growth?
While market-related headlines are plentiful, one noteworthy development flew under the radar—the Atlanta Federal Reserve’s Real GDP Nowcast estimates Q1 GDP at -1.5%. This is a sharp contrast to the 2% growth expectation at the start of the quarter, raising the possibility of renewed recession discussions.
While the Nowcast is generally a reliable indicator, investors should be aware of a key flaw before the final GDP number is released.
The chart above illustrates how the GDP forecast sharply declined in late February, coinciding with recent tariff announcements. GDP is calculated using various metrics, but one key factor to watch is net imports. When U.S. businesses purchase goods from abroad, those transactions don’t contribute to domestic GDP—instead, they count as a drag on economic growth.
Ahead of the tariff hikes, many companies accelerated imports to build up inventory before higher costs took effect. As a result, a negative Q1 GDP print is likely, reflecting this front-loaded activity. However, with businesses stocked up, Q2 GDP could see an artificial boost, mirroring the artificial drag expected in Q1.
Post Election Years Glidepath
The stock market started strong in January but gave back those gains in February. Historically, this pattern is quite typical, as Q1 in a post-election year often experiences heightened volatility and choppy trading.
From 1950 to 2024, the S&P 500 averaged a 7.9% return in post-election years. Historically, gains tend to be slow early in the year, with momentum picking up in the summer and a rally into year-end. While every year is unique, the current market volatility isn’t out of the ordinary. Despite the abundance of headlines, stepping back and looking at historical data shows that these market swings align with past post-election years.
Articles We’re Reading
France, UK, and Ukraine announce agreement to work on a ceasefire plan to present to United States (AP)
Treasury Secretary Bessent urges Canada, Mexico to match US tariffs on China as deadline looms (Reuters)
US likely added jobs at moderate pace in February with unemployment rate seen staying stable (Bloomberg)
Global hedge funds sold more stocks than they bought last week by the largest amount in a year (Reuters)
Market Snapshot
For the Month Ending 2/28/2025 (Cumulative Returns)1
1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.
Did You Know?
The St. Patrick’s Day Indicator is a lighthearted market superstition suggesting that if stocks perform well on March 17th, the market may continue to rally into the second quarter. While not an official market signal, some traders have noticed a historical trend of positive market performance around this time.
Historically, March has been a strong month for equities, with the S&P 500 often showing gains. Some analysts attribute this to seasonal factors like tax refunds, portfolio rebalancing, and renewed investor optimism as spring approaches. However, like most market “indicators,” correlation doesn’t imply causation—so while a green market on St. Patrick’s Day is fun to see, it’s no guarantee of future performance!
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.
