Investors Have Never Been So Worried That The Stock Market Is Going To Crash
Historical data on investor beliefs about crash probabilities researched by Yale University finance professor (and Nobel laureate) Robert Shiller for more than 2 decades by surveying investor sentiment. He and his colleagues ask ...
“What do you think is the probability of a catastrophic stock market crash in the U. S., like that of October 28, 1929 or October 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.)”
- In August, the U.S. Crash Confidence Index (CCI) fell to a record low — at 13%, meaning that 87% of respondents believed the probability of a crash to be greater than 10%.
- In September, the reading was a still-low 15%.
Strong statistical support for the contrarian interpretation emerged when I analyzed the CCI back to 2001 (which is when the survey began to be conducted monthly).
What we are going through now resembles the spring of 2009: however then the stock market was far less overvalued than it is today, as judged by the Cyclically-Adjusted Price Earnings (CAPE) ratio — if not outright undervalued. The market’s strong performance after the spring of 2009 might therefore have been a reaction to the market’s valuation rather than a contrarian reaction to the widespread crash anxiety.
Furthermore, Shiller added, there is a behavioral basis for concern: anxiety increases the chances “that a negative, self-fulfilling prophecy will flourish.”
I nevertheless cling to my analysis, since even after eliminating 2009 from the sample the contrarian interpretation continues to enjoy statistical support.