Dont You Worry bout a Thing: Tell That to Individual Investors!
Key Points
- Some attitudinal measures of investor sentiment show troublingly high levels of optimism.
- Longer-term sentiment surveys that separate individuals from institutions show something much, much different.
- These longer-term surveys suggest there’s little risk that the “wall of worry” the market likes to climb is crumbling.
I write and talk about investor sentiment quite often, particularly when it becomes extreme- at either the optimistic or pessimistic end of the spectrum. There are myriad indexes I review regularly, several of which are incorporated into the Crowd Sentiment Poll, put together by Ned Davis Research (NDR), as seen below.
Crowd Sentiment Spiked With Rally
Source: FactSet, Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2014© Ned Davis Research, Inc. All rights reserved.), as of November 25, 2014.
It should not be surprising to see optimism having spiked in light of the ferocious rally in the stock market off the October lows. This index is now back into the zone in which the stock market has historically had a bit of trouble, at least short-term. Remember, this is a contrarian indicator.
Wall of worry
But there are a few other interesting sentiment surveys that suggest the so-called “wall of worry” the stock market likes to climb remains intact. My thanks to Bespoke Investment Group (BIG) for highlighting a couple about which I was less familiar—and one I’ve discussed on these pages in the past.
Robert Shiller at Yale is well-known for his “cyclically-adjusted price/earnings” ratio (CAPE). But via the Yale International Center for Finance he has been conducting a few interesting sentiment surveys since 1989—posing questions to both individual and institutional investors.
The first chart below shows the results for a question asking investors about their confidence in the market not suffering a crash. I’ve highlighted this one several times in the past. It’s a bit convoluted in terms of how the question is posed and how the data is charted; but the way to read it is if the reading is low (and falling), it means there is increasing confidence there will be a market crash.
Low Confidence Crash Will Be Avoided
Source: Yale School of Management, International Center for Finance, as of October 31, 2014.
It should come as no surprise that the all-time low in this survey was near the crescendo of the financial crisis in late-2008. At that time, confidence among individuals and institutions was nearly equally low that there would be no market crash. Earlier this year, the reading ticked up to its highest level of the current bull market, meaning investors were less worried about a crash. But what’s most interesting lately is that alongside a very strong market rally since October, this survey has dropped noticeably, meaning investors’ worries about a crash have gone up alongside the market’s rally.
The next chart below shows the results for a question asking investors about their confidence in the market going up over the next year. Interestingly, individual investors’ confidence has generally been in a weakening cycle over the past 14 years, and today’s confidence (or lack thereof) is even lower than it was during the heat of the financial crisis. Institutional confidence has been a bit steadier, albeit with more short-term volatility.
Confidence in Market Sinking
Source: Yale School of Management, International Center for Finance, as of October 31, 2014.
As you can see above, there was a very large gap between individuals’ and institutions’ confidence earlier this year; with institutions well more bullish. Both cohorts have recently become much more bearish, although the spread remains quite wide. Notable is the fact that individuals have a record low level of confidence in the history of this survey.
The final chart below shows the results to a question asking investors about their confidence in market valuation. Much like with the prior two surveys, individual investor confidence has plunged. Individual investors today believe the market is more highly-valued than any time since 2001, just after the bursting of the tech stock bubble.
Confidence in Valuation Sinking
Source: Yale School of Management, International Center for Finance, as of October 31, 2014.
These Yale surveys are longer-term in nature and highlight the persistence of skepticism during the bull market underway since March 2009. So, although I and other sentiment-watchers may fret about data like that seen in NDR’s Crowd Sentiment Poll (and/or among its component indexes), there is little to worry about from a longer-term sentiment perspective. This has been the “most hated bull market in history” as noted by BIG, and reinforces the “wall of worry” the stock market is likely to continue to climb.
© Charles Schwab
