The latest survey results of The Yale School of Management (SOM) Stock Market Confidence IndexesTM report an improvement in investor confidence since the stock market bottomed nearly a year ago in October 2002, but not a consistent or strong improvement by most indicators.
The market reached its lowest point since the 2000 peak on October 9, 2002, and is now up by about a third as measured by the S&P500.
"At a rational and quantitative level, everything appears to be all right among investors," says Robert J. Shiller, the Stanley B. Resor Professor of Economics at the Cowles Foundation for Research in Economics and a faculty fellow at SOM's International Center for Finance, who directs the Confidence Indexes. "According to the survey, 90% of individual investors and 87% of institutional investors expect the stock market to go up in the next year. These are at close to the highest levels of optimism observed since we started collecting these data in 1989. And yet, their quantitative expectations for the market are not necessarily going to translate into a long-term increase in demand that will promote market values."
Despite improved confidence in the market's short-term performance, Shiller notes investors' attitudes toward the long-term have plummeted.
In a separate survey of high-income Americans, he asked how much they agreed with the statement: "The stock market is the best investment for long-term holders, who can buy and hold through the ups and downs of the market." In 2001-2002, 60% strongly agreed with this statement; that number fell to 40% in 2003.
"There is a sour attitude among investors fed by market declines and the sequence of scandals, including the recent investigation of the mutual fund industry. Whatever their opinions about what the stock market will do this year, they just aren't so sanguine about it as long-term investment," says Shiller.
The Yale SOM Stock Market Confidence IndexesTM are the longest-running survey of investor confidence and related attitudes in existence. Random samples of wealthy individual and institutional investors have been collected continuously since 1989. The consistent comparisons of survey results across four indices over time offer a unique overview of investor sentiment:
According to Shiller, the survey also showed that:
* Forty-four percent of individual investors and 51% of institutional investors attach little probability to a stock market crash in the next six months. Apparently, the sharp declines that led to the market bottom in October 2002 increased fears of a stock market crash, and the increases since then have reduced those fears, says the Yale economist, adding that leading up to October 2002, only 23% of institutional investors and 29% of individual investors said the market would not crash in the succeeding six months.
* Ninety percent of individual investors and 87% of institutional investors expect an increase in the Dow in the coming year. These are at close to the highest levels of optimism observed since data collection for these surveys began in 1989, Shiller notes.
* Sixty-seven percent of individual investors and 63% of institutional investors expect the market to rebound the next day should the market ever drop 3% in one day, compared to 58% and 55%, respectively, just prior to October 2002.
* Seventy-five percent of institutional investors and 68% of individual investors believe the market is not valued too high. The survey reported confidence levels of 60% for institutional investors and 73% for individual investors leading up to October 2002.
According to Shiller, the picture of improving confidence since October 2002 does not appear to be strong enough to account by itself for the increase in the stock market that has occurred since then. An important reason for the increase in the stock market since October 2002 can be placed on the dramatic increase in corporate earnings over the same time period, he says. Quarterly as-reported S&P500 earnings are up 30% from the first quarter of 2002 to the first quarter of 2003. The improved earnings picture, not improved investor confidence, appears to be the main reason for the increase in the stock market, he notes.
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