Both individual and institutional investors' confidence in the stock market remains "unshaken" in the wake of the Sept. 11 terrorist attacks and the Enron scandal, according to four new indexes developed by economist Robert J. Shiller for the International Center for Finance at the Yale School of Management (Yale SOM).
Such resilient confidence "is a powerful support for the market," says Shiller, a faculty fellow at the Yale center and the Stanley B. Resor Professor of Economics at the University's Cowles Foundation for Research in Economics.
Shiller is the author of the best-selling book "Irrational Exuberance," an analysis of the stock market boom. His newest research study -- "The Yale School of Management Stock Market Confidence Indexes"TM -- represents the longest-running comprehensive effort to measure investor confidence and related investor attitudes in the world.
Despite the stock market peak in subsequent down markets and the terrorist attacks in September, says Shiller, investor confidence has "rebounded" in all four categories measured. The new indexes include:
* One-Year Confidence Index: The percent of the population expecting an increase in the Dow Jones Industrial Average in the coming year.
* Buy-On-Dips Confidence Index: The percent of the population expecting a rebound the next day should the market ever drop 3% in one day.
* Crash Confidence Index: The percent of the population who attach little probability to a stock market crash in the next six months.
* Valuation Confidence Index: The percent of the population who think that the market is not too high.
"Survey data is only interesting and telling if you could make consistent comparisons over a duration of time," explains Shiller. Under his supervision, a consistent number of high-income Americans and institutional investors were polled periodically beginning in 1989 through the present to determine the current status of investor confidence in each of the four confidence indexes.
The investors were asked such questions as:
* How much of a change in percentage terms do you expect to see in the Dow Jones Industrial Average for the next six months? One year? 10 years?
* If the Dow dropped 3% tomorrow, how would the Dow move the day after tomorrow?
* What do you think is the probability of a catastrophic stock market crash in the United States like that of Oct. 28, 1929 or Oct. 19, 1987 in the next six months, including the possibility that a crash could occur in other countries and spread to the United States?
* Are stock prices in the United States too low, too high or just right, when compared with measures of true fundamental value?
"The stock market peaked in early 2000 and there has been a much-discussed down market since then, especially with the NASDAQ index, but instead of harming investor confidence, the experience has led to a rebound in all four confidence areas measured," says Shiller.
"Also, the Sept. 11 crisis did not produce any striking changes in any of the U.S. indexes," he notes. "Confidence of individual investors remains roughly as high, if not higher, with the latest data than it was before Sept. 11. Among individual investors, Buy-On-Dips Confidence and Valuation Confidence rose substantially after the terrorist attacks. These indexes suggest that perceived risk in the stock market is very low by historical standards.
"Individual investors have relatively little fear today that anything could go wrong with the stock market," he says, adding, "This fact may help explain why U.S. stock prices are extremely high relative to earnings."
To access the Yale School of Management Stock Market Confidence IndexesTM and relative survey data, visit the Yale International Center for Finance website at http://icf.som.yale.edu/confidence.index.
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