The Yale School of Management Stock Market Confidence Indexes ™ Reveal Improved Corporate Earnings, Not Investor Confidence, Behind 2002-2003 Stock Market Increase

New Haven, Conn.--September 30, 2003--The latest survey results of The Yale School of Management Stock Market Confidence Indexes™ report an improvement in investor confidence since the stock market bottomed nearly a year ago in October 2002, but not a consistent or strong improvement by most indicators. The market reached its lowest point since the 2000 peak on October 9, 2002, and is now up by about a third as measured by the S&P500.

Economist Robert J. Shiller, bestelling author of Irrational Exuberance, directs the Confidence Indexes. Commenting on the survey results, Shiller said, "At a rational and quantitative level, everything appears to be all right among investors. According to the survey, 90 percent of individual investors and 87 percent of institutional investors expect the stock market to go up in the next year. These are at close to the highest levels of optimism observed since we started collecting these data in 1989. And yet, their quantitative expectations for the market are not necessarily going to translate into a long-term increase in demand that will promote market values."

Despite improved confidence in the market's short-term performance, Shiller notes investors' attitudes toward the long-term have plummeted. In a separate survey of high-income Americans, he asked how much they agreed with the statement: "The stock market is the best investment for long-term holders, who can buy and hold through the ups and downs of the market." In 2001-2002, 60 percent strongly agreed with this statement; that number fell to 40 percent in 2003. "There is a sour attitude among investors fed by market declines and the sequence of scandals, including the recent investigation of the mutual fund industry. Whatever their opinions about what the stock market will do this year, they just aren't so sanguine about it as long-term investment," said Shiller.

The Yale School of Management Stock Market Confidence Indexes™ are the longest-running survey of investor confidence and related attitudes in existence. Random samples of wealthy individual and institutional investors have been collected continuously since 1989. The consistent comparisons of survey results across four indices over time offer a unique overview of investor sentiment:

The Crash Confidence Index is the indicator of stock market confidence that has shown the most distinct increase since October 2002, both for individual and institutional investors. Forty-four percent of individual investors and 51 percent of institutional investors attach little probability to a stock market crash in the next six months. Apparently, the sharp declines that led to the market bottom in October 2002 increased fears of a stock market crash, and the increases since then have reduced those fears. Leading up to October 2002, only 23 percent of institutional investors and 29 percent of individual investors said the market would not crash in the succeeding six months.

One-Year Confidence Index: Confidence that the stock market will go up in the next year has also increased since October 2002 for both individual investors and institutional investors. Ninety percent of individual investors and 87 percent of institutional investors expect an increase in the Dow in the coming year. These are at close to the highest levels of optimism observed since data collection for these surveys began in 1989. Leading up to October 2002, One-Year Confidence levels were reported at 86 percent for individual investors and 81 percent for institutional investors.

Buy-On-Dips Confidence Index: Both individual investors and institutional investors shared a slight increase in confidence that the stock market will rise the day after a sharp fall since October 2002. Sixty-seven percent of individual investors and 63 percent of institutional investors expect the market to rebound the next day should the market ever drop 3 percent in one day compared to 58 percent and 55 percent, respectively, just prior to October 2002.

The Valuation Confidence Index measures the percent of the population who think that the market is not valued too high. Individual investors were somewhat more skeptical about market value than were institutional investors. Seventy-five percent of institutional investors and 68 percent of individual investors believe the market is not valued too high. The survey reported confidence levels of 60 percent for institutional investors and 73 percent for individual investors leading up to October 2002.

Shiller's Interpretation

The picture of improving confidence since October 2002 does not appear to be strong enough to account by itself for the increase in the stock market that has occurred since then. An important reason for the increase in the stock market since October 2002 can be placed on the dramatic increase in corporate earnings over the same time period. Quarterly as-reported S&P500 earnings are up 30 percent from the first quarter of 2002 to the first quarter of 2003. The improved earnings picture, not improved investor confidence, appears to be the main reason for the increase in the stock market.

Data Collection

Data for The Yale School of Management Stock Market Confidence Indexes™ are collected on Professor Shiller's supervision at the Yale School of Management's International Center for Finance. Surveys were initially conducted at six-month intervals. Starting in July 2001, for the U.S. surveys, he reports a monthly six-month average. For example, the number for January 2002 is an average of results from surveys between August 2001 and January 2002. Sample size has averaged a little over 100 per six-month interval since the beginning of the surveys. This means that standard errors are typically plus or minus five percentage points. A parallel effort to sample Japanese investor attitudes has been undertaken since 1989 by Professor Yoshiro Tsutsui of Osaka University and Fumiko Kon-Ya of the Japan Securities Research Institute.

About Robert Shiller

Robert J. Shiller is a Faculty Fellow at the Yale School of Management's International Center for Finance. He is also the Stanley B. Resor Professor of Economics at the Cowles Foundation for Research in Economics at Yale University. He is the bestselling author of The New Financial Order and Irrational Exuberance.


For an interview with Professor Shiller, contact Tabitha Wilde, Associate Director of Media Relations, Yale School of Management, 203-432-1060; tabitha.wilde@yale.edu. To access The Yale School of Management Stock Market Confidence Indexes™ and relative survey data, visit the Yale International Center for Finance website at: http://icf.som.yale.edu/confidence.index/.