Sentiment, Value, and Market-Timing

Abstract

It is easy, in hindsight, to conclude that all but a handful of investors were exuberantly bullish at the top of the market in 1999 and that all bullishness disappeared by 2002. But foresight is not hindsight, and today's promises of sure market timing are as misleading as yesterday's. Expectations of investors during the time of the bubble and its aftermath were different as reflected on Internet message boards, in the Gallup/UBS surveys of individual investors, and in the BusinessWeek surveys of Wall Street strategists. Yahoo postings show most investors were indeed bullish during the time of the bubble, but many were bearish, concerned about lofty valuations and wary of manipulation, hype, and insider trading. Bullishness subsided by 2002, but hope remained. Gallup surveys show many individual investors thought that the stock market was in a bubble in the late 1990s but most expected the bubble to inflate. By 2002, fewer investors thought the stock market was in a bubble, but fewer expected stock prices to inflate. BusinessWeek surveys show Wall Street strategists were more bearish than individual investors during the bubble, but when deflation of the bubble turned individual investors bearish, it turned Wall Street strategists bullish. By December 2002, individual investors expected a median stock market return of 5% in 2003, while Wall Street strategists expected more than 20%.