US: State Street Investor Confidence Index

January 31, 2017 09:00 CST

Actual Previous Revised
State Street Investor Confidence Index 93.8 94.2 94.1

The State Street Investor Confidence Index fell 0.3 points to 93.8 in January, with the December reading revised downward by 0.1 points to 94.1. The slight decline in global sentiment was driven by a pronounced 7.0 point drop in the European component to 92.9 and also weakened by a 0.4 point decline in the Asian component to 108.1. In contrast and countering the downward pull on the index, the North American component rose 2.0 points to 89.6.

With sub-100 index readings indicating that institutional investors are more risk averse and decreasing their holdings of equities, State Street noted that geopolitical risk and stretched valuations were the main drag on sentiment, and worries about trade policies and a stronger dollar have taken center stage with the new US Administration in place. In Europe, institutional investor concerns about the impending French and Dutch elections, as well as a hard Brexit may have intensified the cautious tone.

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.