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The No-Fear Factor
Despite recent crises, SOM study shows investor confidence high
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Business New Haven
3/18/2002
By: BNH
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How confident are individual and institutional investors following the September 11 terrorist attacks and amid heightened doubts about the integrity of financial reporting sparked by Enron Corp.?
A new study from the Yale School of Management's International Center for Finance announces four new indexes devised by SOM faculty fellow Robert J. Shiller, concluding that both individual and institutional investors' confidence remains “unshaken.” Such resilient confidence, says Shiller, “is a powerful support for the market.”
Shiller is the author of a business bestseller about the stock market, Irrational Exuberance. His newest research study represents the longest-running comprehensive effort to measure investor confidence and related investor attitudes in the world. Despite the stock market peak in 2000, subsequent down markets, and the terrorist attacks of September 11, he observes that investor confidence has “rebounded” in all categories measured.
“The stock market peaked in early 2000 and there has been a much-discussed down market since then, especially with the NASDAQ index,” Shiller says. “But instead of harming investor confidence, the experience has led to a rebound in all four confidence areas measured.”
“Also, the September 11 crisis did not produce any striking changes in any of the U.S. indexes,” he says. “Confidence of individual investors remains roughly as high, if not higher, with the latest data than it was before September 11.”
Shiller also explains that, among individual investors, “buy-on-dips” confidence (which measures confidence that the market will rebound the day following a decline of three percent or more) and “valuation confidence” (investor belief that stocks are reasonably priced) rose substantially following the terrorist attacks. “These indexes suggest that perceived risk in the stock market is very low by historical standards,” he says.
“Individual investors have relatively little fear today that anything could go wrong with the stock market,” Shiller concludes. “This fact may help explain why U.S. stock prices are extremely high relative to earnings.”
The data also suggests that investors believe the probability of a catastrophic stock market crash in the U.S., similar to those of October 28, 1929 or October 19, 1987, within the next six months, is very low.
In addition to being a faculty fellow at SOM's International Center for Finance, Shiller is also the Stanley B. Resor Professor of Economics at the Cowles Foundation for Research in Economics at Yale University. His book Irrational Exuberance is an analysis and explication of the stock market boom since 1982. He is currently working on his fifth book.
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