Developed by Harvard University professors Kenneth Froot and Paul O’Connell of State Street Associates, the State Street Investor Confidence Index measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: The greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their allocations to risky assets. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors.
Since inception of the State Street Investor Confidence Index in 1998, global investor confidence has ebbed to a 14-year low as October’s reading of 80.6 surpasses October 2008′s reading of 82.1. State Street readings are monthly.
In the chart below, I plot the Global Confidence data (black line) with the SPX (green line) since early 2000. Eerily, this measure is now below that of the “Great Recession,” when the grips of financial panic were setting in during late 2008 and early 2009.
Per Slate Street's press release: “Institutional investors continue to display a pronounced, almost secular desire to reallocate away from equities and towards fixed income and cash securities, and this desire has accelerated through the recent market correction.” State Street also assigns a North American Investor Confidence measure, which is less dire, albeit low and trending lower. The North American reading declined month over month to 79, which is the lowest level since December 2008!
In the below chart, the black line is the State Street North American Confidence Index plotted with the SPX.
Quoting State Street again “This shift is reflective of the changed investment outlook, with improved US prospects offset by slowing growth in the Asian region. The net effect is that institutional investors have little appetite for risky assets.”
The contrarian in me is amazed by the resilience of equity markets such as the Standard & Poors 500 index in the face of this pervasive negativity. Every day we are reminded of another reason why the equity markets should head lower, not higher.
Maybe it is a hard-wired cognitive bias we as humans possess that has been freshly stoked by the recent crisis. Prepare for the worst, but, hope for the best. A "fool me once, shame on you; fool me twice, shame on me” attitude…
Where there is risk, there is opportunity and it is tough to imagine a bull market perishing in the face of despondency and disbelief.
This article by Chris Prybal was originally published on Schaeffer's Investment Research.
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No positions in stocks mentioned.