The index is a rolling six-month average of the percentage of monthly respondents who think that the probability of such a major crash is less than 10 percent. In August, the percentage of individual investors with that level of confidence in the market hit a record low, 13 percent. The most recent reading in September, 15 percent, was still extremely low.
Institutional investors — people who make decisions for pension funds, mutual funds, endowments and the like — were a bit more confident, with a September reading of 24 percent, but that was extremely low, too. In short, an overwhelming majority of investors said there was a greater than 10 percent probability of an imminent crash — really, a remarkable indicator that people are quite worried.
Another of my stock market confidence indexes, the Valuation Confidence Index, is also near a record low in 2020. It is based on this question: “Stock prices in the United States, when compared with measures of true fundamental value or sensible investment value, are: 1. Too low; 2. Too high; 3. About right; 4. Do not know”?
This index tells us the proportion of investors who think the market is not too highly priced. At the latest measure in September 2020, the reading for individual investors stood at 38 percent, far lower than at the bottom of the stock market in March 2009, when it stood at 77 percent after the financial crisis. For institutional investors, it was 46 percent in September, compared with 82 percent in March 2009.
Despite these signs of distress, the stock market has been trading near a record high, stretching the valuations of stocks to fairly rich levels. That’s very different from the situation in March 2009, when stock valuations were quite low and the stock market subsequently rose. It is a different situation now, however: Not only is investor confidence low, but actual stock valuations are quite high.