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Individual investors have never been so afraid of the US stock market crash. and that’s great news. This mixed reaction is due to the fact that investor sentiment is basically a controversial indicator, but in essence, it would be more concerning if investors thought that the probability of a collapse was low.
The historical data on investors’ beliefs about the probability of a collapse comes from Robert Shiller, a finance professor at Yale University (who, by the way, is not a Nobel laureate, either). Shiller and his colleagues have been examining investor sentiment for more than two decades, asking the following question:
What do you think is the probability of a catastrophic stock market crash in the U.S., such as October 28, 1929 or October 19, 1987, in the next six months, including the possibility that the crash happens in other countries? and spread to the US (A 0 percent answer means it can’t happen, and a 100 percent answer means definitely yes.)
The following figure shows the results, to which Shiller et al. They are referred to as the “US Shock Confidence Index.” Or CCI. The graph shows the percentage of individual investors who say the probability of collapse is less than 10 percent. So the lower values on the chart mean that more investors think a crash is likely.
In August, the record for the U.S. Crash Confidence Index (CCI) fell to a low of 13 percent, meaning that 87 percent of respondents believed the probability of a collapse exceeded 10 percent. hundred. In September, the value of the index remained low at 15 percent.
A close examination of the diagram also shows why a contradictory interpretation of the ICC can be justified. Note that the other time the index fell as much as today was in the spring of 2009. This coincided with the bottom of the bear market caused by the financial crisis, which turned out to be a great opportunity for stock investment.
Without a doubt, the experience of early 2009 is just a piece of information. But strong statistical support for the contradictory interpretation emerges when we analyze the ICC from 2001 (when the survey started monthly). The following table summarizes the inflation- and dividend-adjusted average yield of the S&P 500 for fear of collapse:
The strongest results are on the 24-month horizon, where the difference between the results shown in the table is significant at the 95 percent confidence level that statisticians often use to determine whether a sample is true. On the contrary, the difference observed in the 12-month horizon has a marginal statistical significance.
This is not the only way to interpret it
Analyzing the ICC in the above way is not the only way of interpretation. In a recent New York Times op-ed, Shiller pointed out a big difference between the current situation and the situation in the spring of 2009: Based on the CAPE rate, the stock market at that time was far from overvalued as it was. is today. The strong performance of the equity market after spring 2009 was therefore a reaction to its market valuation rather than a controversial reaction to widespread fears of a collapse.
If that were the case, it is worth thinking twice about whether the widespread fear of collapse today is that optimistic. Additionally, Shiller added that anxiety has a behavioral basis: Anxiety increases the chances that “a negative, self-fulfilling prophecy will blossom.”
(Market watch)
Cover image: Spencer Platt / Getty Images
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