Investor Confidence Shifts Into a Lower Gear

Individual investors see inclement weather on the horizon

Early gains turned to losses for the Dow Industrials, which could not rebound after yesterday's steep sell-off. The S&P 500 managed slight gains, while the Nasdaq posted healthy returns on the day as investors have been gravitating back toward the tech winners that led the 2020 recovery rally. One of the patterns this year has been for investors to flock to big growth stocks in times of market and economic uncertainty, treating them almost as safety plays while the uncertainty swirls in the wind. It has been effective so far.

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Wilshire 5000 / GDP Ratio

Investor confidence, in general, has shifted into a lower gear. You told us as much in our recent survey (more below), but broadly speaking, individual investors see inclement weather on the horizon. A lot of it is pinned on Nov. 3 and its aftermath, but you, like a lot of people, feel the disconnect between the economy and the markets is widening dangerously.

US Crash Confidence Index
Chart courtesy Yale University International Center for Finance.

How's Your Confidence?

2020 has tested it, for sure. We've had a bear and bull market in the same year as a recession, a global pandemic, and a volatile election, not to mention dozens of other issues that bring anxiety with them.

According to our recent survey, you are still nervous – especially about the election (more on that below). But you are far more confident than the wider pool of survey responders that Yale University's International Center for Finance tracks on a monthly basis. Every month, the survey asks the following question: 

“What do you think is the probability of a catastrophic stock market crash in the U.S., like that of Oct. 28, 1929 or Oct. 19, 1987, in the next six months, including the case that a crash occurred in the other countries and spreads to the U.S.? ( An answer of 0% means that it cannot happen, an answer of 100% means it is sure to happen.)”

While still low, compared to March and April, those numbers have been trending a bit higher lately.

Contrarian Indicator?

Many believe that Yale's index is a contrarian indicator. The old "Be fearful when others are greedy, and greedy when others are fearful" adage. The best returns start to come just when investors become paralyzed with fear, and then big money moves in at cheap prices and the herd rushes after it. 

But 2020 has been the year of the unexpected and individual investors may feel that more is in store.

Half of Invested Readers Still Expect a Short-Term Drop in the Market

Your Survey Results

You, dear readers, are not as pessimistic. You are educated investors, so you keep things in perspective. Still, our recent survey results indicate that more than half of you feel another sell-off is coming within the next three months. We've been getting a taste of that lately, but nothing like the fun we had in the spring.

On the one hand, you have a fear of missing out on more returns in the equity market. On the other, you have elevated anxiety about the outcome and aftermath of the election and what that will do to your portfolios.

Investors are Still Very Concerned About the Election Impacting Their Portfolios

The Election is the Overhang

Just like with the last round of surveys we did with you, the election is still your number one concern. You don't have a collective clear opinion of who will win – it's pretty split – but you are worried about what comes after the election. Part of those concerns are centered around policy issues, while part of those are centered around the potential for social unrest in the days following the election

We'll be sharing more results with you in the coming days. We thank you, as always, for taking the time to respond to the survey. We know how lucky we are to have smart and engaged readers like you.

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The Investopedia 100

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Article Sources
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  1. Yale School of Management. "United States Stock Market Confidence Indices."

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