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Tuesday
Jan102012

Yale's Crash Confidence Index Shows Just How Fearful Investors Have Become

The Yale School of Management has been conducting its own market sentiment surveys for some time now.  One of its surveys is the Crash Confidence Index, which asks both individual and institutional investors how confident they are that there will not be a stock market crash in the next six months.  Recent results from the survey show just how worried investors recently became.

As shown below, early 2009 marked the low point in the Crash Confidence index for both individual and institutional investors.  That was the point where the least number of investors were confident that there wouldn't be a stock market crash in the next six months.  Early 2009 was also when the market ultimately made its financial crisis low, so just when investors became the most fearful of a crash, the market was about to turn a corner and head significantly higher. 

The Crash Confidence Index rebounded somewhat throughout the '09-'11 bull market, but it once again moved sharply lower in late 2011 as the sovereign debt crisis really took hold.  As shown, individual investors were almost as worried in the most recent reading as they were back in early 2009.  Institutional investors have also become worried, but not nearly as worried as the individual has become or they were back in 2009.

There's a general consensus in the financial community that things in the US aren't nearly as bad now as they were back in '08 and early '09, but don't try and tell the retail investor that.  They're truly spooked.  Fortunately, this is a contrarian indicator, which provides a reason to be bullish on the market going forward.

Subscribe to Bespoke Premium and gain access to our 2012 outlook piece -- The Bespoke Report -- when it is released next week.

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