When investors believe something is about to happen they will take action, such as selling off their equities to avoid losses, which can impact prices. This can also signal the onset of a bear market.
In any economy, confidence levels influence and provide information on social and financial developments in the future. For companies and the stock market, business confidence indicates expectations of firms, based upon surveys on production, orders, and finished goods in the sector. The business confidence index can also be used to check growth and anticipate curves in economic activity. Around the world, numbers above 100 suggest optimism in near business performance, whereas numbers below 100 show pessimism.
English economist John Maynard Keynes coined the term “animal spirits” to describe the up and downs of confidence among investors and businesses. Companies are asked about their expectations for the months to come in a survey which gives the business confidence average.
Here are various indicators which mark shifts in consumer and business confidence:
1. Changes in interest rates of exchange rates
2. Movements in employment levels and business investments
3. Shifts in the prices of goods and services, such as petrol, healthcare, education, etc
4. External economic or financial shocks, such as the financial crisis of 2008/09
5. Policy shifts in the stance of government fiscal policy, including spending cuts or taxation rates
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.
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.
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.
“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.
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.
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.
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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