A notable divergence is taking place in the U.S. stock market. A growing percentage of investors believe that stock valuations are too high. Yet a record number of investors also think that stock prices will be higher one year from now. Such is a toxic brew of sentiment that potentially does not end well.
Overconfidence
The Investor Behavior Project at Yale University under the direction of Professor Robert Shiller publishes four different stock market confidence indices for the United States. Two of these four confidence indices are known as the U.S. Valuation Confidence Index and the U.S. One-Year Index. And the themes implied by the latest data from these indices suggest a stock market filled with investors that are becoming increasingly disconnected from rationale and reality.
That's Rich
Let's first consider the U.S. Valuation Confidence Index, which is shown the chart below. This index is based on a question asked to both institutional and wealthy individual investors regarding stock prices (NYSEARCA:SPY) and how they are priced when compared to "true fundamental value" or "sensible investment value." The Index measures the percentage of the survey population that thinks the stock market is not too high from a valuation perspective. Thus, the lower the reading, the more respondents think the stock market is overvalued.
Historically, roughly 68% of institutional investors and 62% of wealthy individuals on average have viewed stock market (NASDAQ:QQQ) values as not too high at any given point in time. As recently as one year ago in March 2016, a reasonable 64% of institutional investors believed stock valuations were at least reasonable. Wealthy individual investors were notably more skeptical a year ago, but were still evenly split at 50% about stock valuations.
Following the strong run higher in stocks since November, the percentage of institutional and individual investors that think
