We have to admit, this data appears pretty counter-intuitive.
As shown below, State Street’s Investor Confidence Index, which measures investment confidence from institutional investors, still remains well below the high it hit in the summer of 2009. Even after all the positive economic data that has come out since mid 2009, and the substantial market rally we’ve seen as well.
Pros are less bullish now? The indicator is below both 2007 and 2009 highs, and is just at the level of 2008’s peak…
Here’s how State Street says the model works:
The State Street Investor Confidence Index® measures the attitude of investors to risk. Developed by Harvard Professor Ken Froot and State Street Associates Director Paul O’Connell, the Index uses the principles of modern financial theory to model the underlying behaviour of global investors. Unlike other survey-based confidence measures that focus on expectations for future prices and returns, the Index provides a quantitative measure of the actual and changing levels of risk contained in investment portfolios representing about 15% of the world’s tradable assets.
Ah, a black-box quant model. This isn’t exactly confidence-inspiring as to its accuracy, especially given the seemingly wacky result above.
Are investors really less bullish than mid-2009? It seems ridiculous.
But… the spike in State Street’s indicator indeed preceded a major second-half 2009 S&P 500 rally. It was right then.
It also did a decent job of spiking ahead of the 2007 S&P 500 rally, and arguably might have done the same for 2003.
So perhaps the way to read this index is that investors are now less willing to commit new capital than during mid-2009, given many institutions have already increased their risk-taking exposure already.
Thus State Street’s index might be less wild than it seems. It’s not exactly a measure of sentiment, but rather a measure of the willingness for people to take additional risk with additional capital. It could be a decent forward indicator of risk-taking fund flows. And on that note, the index has just rebounded.
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