Institution Confidence in Rally Fades

After buying into the rally late last year, institutions have been selling into the rally since August, according to the latest investor confidence survey from State Street. At a reading of 100, institutions are no long allocating capital towards equities and have clearly moved to a more defensive posture since late summer. Investors in Asia have turned decidedly more bearish as institutions reallocate capital from stocks to less risky assets. The reading of 91.2 in the Asia represents a high level of pessimism regarding the recent move in equities. This change in risk tolerance has also been evident in the underperformance of small cap stocks compared to large caps.

The founders of the index, Ken Froot and Paul O’Connell had these comments on this morning’s reading:

“Across all regions, institutional investors are largely treading water; neither increasing nor reducing their aggregate holdings of risky assets,” commented Froot. “However, the aggregate figures mask some country- and region-specific views. This month, for example, institutional investors aggressively pared their holdings in selected markets, such as Australia, while continuing to add to their emerging markets holdings. Overall, investors are displaying some caution about the current level of equity valuations, and a desire to see more evidence of real economic activity and aggregate demand, particularly in the US, before adding to equity exposures.”

“European investors displayed some increased optimism this month, but elsewhere the evidence is that investors are in a consolidating mood,” added O’Connell. “There is an awareness that structural issues such as the US current account deficit, the Asian current account surplus, and the long-run decline of manufacturing employment will need time to be worked out. In the interim, governments continue to support demand, but investors have an eye on both the temporary nature of the stimulus, and its impact on the overall debt burden.”

The big money is becoming skeptical of the rally. Along with the recent increase in insider selling this data becomes difficult to ignore particularly considering their prescience in allocating capital in late 2008 and early 2009.

Comments

[Gary A]

Time for Goldman and the hedge funds to churn butter out of buttermilk. Just that we are wise to it now.

2009 Nov 24 05:38 PM

[damienhaas]

If there is a lot of skepticism, it is unlikely that the market will fall much as there is caution in the market. You need an unrestrained euphoria in the market that when it the correction come, it will a massive correction.

2009 Nov 24 07:45 PM

[untrusting investor]

Good information. Thanks for posting it. Not surprised to see that institutional investors are not willing to allocate more capital to equities. The big pension funds can't afford yet another disaster if the market falls, so it would not be surprising to see them allocate more to fixed income.

2009 Nov 24 08:38 PM

[Tim McPartland]

If they are not allocating additional capital because of perceived risk why would they not be selling to lock in gains? Something smells in this recent up move--I just haven't quite figured out what it is yet.

2009 Nov 25 12:14 AM

[GreenMom]

What smells is:

beyond anemic volume
horrible unemployment numbers
prime foreclosures eclipsing sub-prime
mortgage re-works defaulting in heavy numbers
no mark to market back on banks' books yet
if health care passes, employers won't hire
many commercial real estate refi's won't happen
bankrupt states planning massive layoffs very soon
unemployment insurance rates skyrocketing = less hiring
$75-80 oil not in tune with supply, hurting consumer
credit card rates skyrocketing will curb spending
cheap dollar driving up commodities, will leave less profit
utilities scrambling for revenue, gouging who's still in business

2009 Nov 25 01:09 AM