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The Dow just closed out the best January in 15 years, but the latest investor confidence survey may foreshadow a different sort of February and full 2012. State Street's Investor Confidence Index declined, driven by European risk reduction, but U.S. investors are the most cautious of all these days. That stands in perfect contradiction to January's performance.

State Street's survey published Tuesday serves as a sort of confirmation of what I see developing for U.S. markets. The financial company's measure of investor confidence showed its Investor Confidence Index fell to a mark of 92.4 globally in January, from 94.5 the month before. The decline was mostly driven by Europe, which we recently argued is already affecting the U.S. economy. Investor sentiment across the pond nearly drowned in it, sinking 10.1 points, to a mark of 91.6 in January.

The reasons here are clear, as the euro area is near certainly in recession. Greece definitely is, with its GDP sinking in the mid-single digits at last check. But the trouble extends beyond Greece, as evidenced by the broad-ranging set of sovereign debt downgrades by S&P recently. The pain has already been felt across European shares, as the EURO STOXX 50 Price EUR gained 0.5% Tuesday and the iShares S&P Europe 350 Index ETF (NYSE: IEV) gained 0.7%.

Asian investors are apparently feeling a bit better about stocks, with that segment measure up 3.3 points to 96.9 in January's survey. Still, while the index is sitting below 100, it means even Asian investors are cutting back on risky assets. What troubles me most is what I see developing for U.S. stocks. The Investor Confidence's North American component index showed the most risk aversion, with a measure of 89.8, down 0.1 from December.

The way economic data has been unfolding of late, investor confidence should wane further alongside consumer confidence, which was reported lower Tuesday. In my view, deteriorating data should also turn the tide on the market rally that started in early October 2011. Tuesday's performance by asset managers seems to agree, with the shares of T. Rowe Price (NASDAQ: TROW), Legg Mason (NYSE: LM), Janus Capital (NYSE: JNS) and Calamos Asset Management (NASDAQ: CLMS) each in the red Tuesday.

State Street's commentary seems to confer with my view, stating that investors in North America and Europe are maintaining "equity positions that can best be described as defensive." For as long as the driver of caution was exogenous, despite Europe's consumption of 20% of U.S. exports, I suppose American stocks could rise. But as the impact of European economic deterioration hits home, and as the ongoing realities within the U.S. economy once again become clear post holiday cheer, I expect further investor confidence deterioration to coincide with real capital damage.

Source: Sour Investor Mood Foreshadows Stock Market Decline