What Is the State Street Investor Confidence Index?

The State Street Investor Confidence Index is an index that measures institutional investor confidence. The index looks at actual levels of risk taken by investors in their portfolios and reports the figure on the last Wednesday of each month. It is not meant to predict future stock market movements.

It was co-developed by Harvard professor Ken Froot and State Street associate director Paul O'Connell.

Key Takeaways

  • The State Street Investor Confidence Index looks at actual levels of risk taken by investors in their portfolios, which in turn says how confident they are.
  • Higher risk, higher confidence. Lower risk, lower confidence.
  • The index is not meant to predict stock market movements.
  • The index is global, composed of regional components, and based on activity in 45 countries.

Understanding the State Street Investor Confidence Index

The State Street Investor Confidence Index measures confidence by looking at actual levels of risk in investment portfolios. Unlike other confidence indices, it is not an attitude survey. The State Street index measures confidence by taking into account the changes in institutional investors' equity holdings. The more of their portfolio that institutional investors are willing to invest in equities, the greater their confidence.

How the State Street Investor Confidence Index is Structured

The State Street Investor Confidence Index is global and is based on activity in 45 countries. The report tracks tens of millions of transactions annually. There are also three local components: North America, Europe, and Asia-Pacific. The separate weightings of the three components vary month to month based on investment activity.

State Street Investor Confidence Index and Market Sentiment

Market sentiment is the general prevailing attitude of investors as to how prices in a market will develop. This attitude is formed by the accumulation of numerous factors, including price history, economic reports, seasonal factors, and current events.

If investors expect the stock market to rise, the sentiment is said to be bullish. If investors expect the stock market to fall, the market sentiment is bearish. It is believed to be a good predictor of market moves, especially when it is more extreme. When a market sentiment indicator moves to an extreme level, it may indicate the underlying market is about to change direction.

Market sentiment is monitored with a variety of technical and statistical methods, such as the number of advancing versus declining stocks and the comparisons of new highs versus new lows.

Additional indicators exist to measure the sentiment specifically of foreign-exchange markets. Various retail foreign-exchange brokerage firms publish positioning ratios (similar to the put/call ratio) and other data regarding their own clients' trading behavior.

Unlike most measures of market sentiment, which measure attitudes, the State Street Investor Confidence Index measures actual holdings.

Example of How to Use the State Street Investor Confidence Index

The Confidence Index figures are often used as a rationalization for past stock market movements or to predict future stock price movements. This is not the function of the index. The index is used to show the level of confidence, nothing more.

In 2014, the index reached 123.9 in September, the highest reading that year. This corresponded to a 9% drop in the S&P 500 between September and mid-October.

In June of 2015, the index hit 127.1, the highest reading of that year, and the S&P 500 declined more than 14% between July and mid-August.

Other times the institutional investors get it right. In April 2018, the index hit 115.3, the highest reading since 2015. That ended up being the bottom in an S&P 500 correction, and the price moved up more than 12% into September of that year.

In 2019, the index stayed below 75 early in the year, even though that was the start of a major S&P 500 advance, and levels were also below 90 heading into a 20% S&P 500 crash that preceded the advance.

The examples are meant to show that the index is not a timing indicator, nor is it an accurate predictor of stock prices.

Difference Between the State Street Investor Confidence Index and CBOE Volatility Index (VIX)

These two indexes measure different things, although both look at the sentiment. The volatility index (VIX) moves inversely to stock indexes. When the VIX is low it indicates complacency, with investors indicating they are not worried. When VIX begins to rise it indicates heightened fear in the marketplace. Like with other indexes, an extremely high VIX reading may forewarn of a rebound in stock prices.

Limitations of the State Street Investor Confidence Index

The index is not typically a good indicator for timing stock trades. Recall that the Confidence Index is global, so it may not always align with local market movements. Regional components of the index may align better.

The index tracks institutional investors, and institutional investors drive prices but don't always get it right. Sometimes they are loaded up at the wrong time, and other times they fail to load up at the right times.

There are multiple factors that may weigh on institutional investors' appetite for risk, not just stock price levels. This is why the index is not good at predicting stock price movements.

Per State Street, the index is not meant to predict market events. It is simply a tool showing institutional investors' appetite for risk as it relates to equity purchases.