US: State Street Investor Confidence Index

Tue Nov 24 09:00:00 CST 2015

Actual Previous Revised
State Street Investor Confidence Index 106.8 114.3 114.0

Investor confidence eased in November to 106.8 vs October's revised 114.0. North America shows a nearly 12 point decline to 112.9 with Asia down more than 9 points to a 100.7 level that is still over breakeven 100 which separates demand for risk from demand for safety. Safety has been in demand in Europe where, however, the index rose more than 6 points but to a still sub-100 reading of 96.5. The report attributes the decline in North America to heightened expectations for a December rate hike and the decline in Asia to strength in the dollar and continued declines in commodity prices. The report ties improvement in Europe to expectations for ECB easing.

The State Street Investor Confidence Index measures confidence by looking at actual levels of risk in investment portfolios. This is not an attitude survey. The State Street Investor Confidence Index measures confidence directly by assessing the changes in investor holdings of equities. The more of their portfolio that institutional investors are willing to invest in equities, the greater their confidence. The report's main index is global and is based on activity in 45 countries. The report tracks more than 22 million transactions annually. There are three published components: North America, Europe and Asia-Pacific. The separate weightings of the three components vary month to month based on investment activity and are not published. Also included in the global index, but also not published, is activity in South America and the Middle East.

Conventional wisdom suggests investors are confident when stocks are rising and pessimistic when falling. But in fact, the State Street group notes prices tend to be higher when economic fundamentals are strong; i.e., when economic indicators are growing at a healthy clip. But a good investor confidence measure "should indicate whether, for a given set of fundamentals, investors are bullish or bearish on risky assets." State Street believes direct measurement, rather than a survey of portfolio managers who often don't have time to fill out monthly questionnaires, is a more reliable approach to sentiment assessment. The investor confidence index is compiled with techniques based on modern portfolio theory. According to State Street, "the more of their portfolios that professional investors are willing to devote to riskier as opposed to safer investments, the greater their risk appetite or confidence." So when investors choose to increase their holdings of risky assets, this confirms their confidence has increased. Incidentally, State Street believes investor confidence can exist in a bear market as well as a bull market. Since market players have become so enamored with consumer attitude surveys, it probably would be useful for both professional portfolio managers and amateur investors to consider investor attitudes.