January 6, 2015, 2:02 PM
Investor confidence that the US will avoid a stock-market crash in the next six months has dropped dramatically since last spring.
The Yale School of Management publishes a monthly Crash Confidence Index. The index shows the proportion of investors who believe we will avoid a stock-market crash in the next six months.
Yale points out that “crash confidence reached its all-time low, both for individual and institutional investors, in early 2009, just months after the Lehman crisis, reflecting the turmoil in the credit markets and the strong depression fears generated by that event, and is plausibly related to the very low stock market valuations then.”
After the darkest days of the financial crisis, investors became more confident that we wouldn’t have a crash. But since May 2014, the index has been falling again. As of last May, about 41% of institutional investors and 39% of individual investors were confident there would be no crash in the next six months.
By December, that confidence collapsed: Less than a quarter of institutional investors and less than a third of individual investors believed that stocks wouldn’t crash.
Investors are starting to worry that a crash could be coming, and Yale’s chart of the index shows the decline in confidence in the second half of 2014.
On the bright side, this may be a contrarian indicator. Its record low of 2009 coincided with the beginning of the current bull market.
If you’re having trouble interpreting the chart, think of it this way: a low reading means fear of a crash is high, and a high reading means fear of a crash is low.