With the stock market surging in 2017 and the Dow Jones Industrial Average surpassing 25,000 for the first time in early January, investor optimism is at levels not seen since the beginning of 2009. As a result, Liz Ann Sonders, chief strategist at Charles Schwab, said that some pullbacks in stocks this year would be "healthy."
According to Sonders, when the stock markets hit milestones, it tends to boost optimism on the part of investors. She pointed to the weekly survey conducted by the American Association of Individual Investors revealing that the ratio of bulls to bears is slightly below 80%. This means that the majority of individual investors polled think the stock market will continue its strong run. Sonders said that the American Association of Individual Investors survey has been that high on the bull side only one other time during the bull market, which signals a "notable pick-up" in optimism.
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Meanwhile, the Investors Intelligence poll, which measures the optimism and pessimism of investment newsletter writers, is at the highest level it has seen during the entire bull run, said Sonders. Moreover, the Schwab strategist noted that the Ned Davis Research Crowd Sentiment Poll is also at its highest level of optimism since the start of the bull market run.
"I do think, given that at-extreme sentiment tends to act as a contrarian indicator, it's just something we need to be mindful of, as we think about the possibility of maybe some more volatility this year," Sonders said in an interview during The Charles Schwab Corporation's (SCHW) Schwab Market Snapshot. "I actually think some pullbacks this year would be healthy, because it might serve to keep this sentiment from getting overly euphoric, which, again, tends to be a contrarian indicator." (Check out more on this iconic broker in the Charles Schwab review.)
Although the stock market is expected to be more volatile and optimism is at high levels, Sonders does not believe that the bull market will end in 2018. She did warn in a recent interview with Yahoo Finance that investors are kidding themselves if they think they can get the same volatility-free gains from stocks this year. "We're getting tighter monetary policy and possibly a bit higher inflation," said Sonders. Traders need to be "mindful in the context of a continued bull market," she said.
In a recent interview with Investopedia, Sonders warned that the markets are marching toward the late innings of the cycle. She pointed to moves on the part of the Federal Reserve to clamp down on its monetary policy and end the stimulus package that it kicked off on the heels of Great Recession as late-stage characteristics.