Why Investor Pessimism Can be a Good Thing

The stock market continues to hover at record levels, yet investor sentiment for the future remains pessimistic. This may seem like a strange dichotomy, but investors have their reasons. Some of the common ones given for this bearish outlook include the U.S. trade war with China, general political uncertainty going into an election year and concerns over the global economic outlook, according to a survey conducted by the American Association of Individual Investors. 

But this gloomy outlook actually can be a good thing. That’s because some experts say stock rallies are more vulnerable to collapse when investor sentiment hits euphoric levels; in those situations, assets can become overpriced. Further, taking a cautious, defensive approach now means potentially limiting future losses if the market does go on a swift downturn. The current sober pragmatism of investors could turn out to be a very good thing indeed.