Chart of the Week

INVESTORS SEEM CAUTIOUSLY OPTIMISTIC

Could 2024 end up being a carbon copy of 2023 for markets?

Last year, many regional stock markets rallied strongly in the first quarter, then experienced a frustratingly long correction over the summer before surging during the final few months of the year.

So far in 2024, most headline indices are holding onto their impressive first half gains, but they have paused of late and another quiet summer potentially lies in store.

Investor sentiment and positioning will play a vital role in determining if another year-end rally will emerge.

The chart below shows the outputs of the American Association of Individual Investors (AAII) US Asset Allocation Survey. It is a monthly measure of how much is invested in stocks, bonds and cash in the average investor’s portfolio.

The dark blue line shows the average portfolio exposure in stocks was 70% in May, well above the two recent bear market lows (55% in March 2020 and 62% in October 2022) and now back up around a multi-decade high. Conversely, average cash and bond exposures have declined of late.

These surveys often send mixed signals and should not be relied upon in isolation, but the chart below is consistent with the general trend that investors have moved to a more risk-on stance over the past couple of years. That argues against the bull market continuing at its recent pace, but there is little on the horizon to suggest a sudden collapse in the average equity allocation.