This index assesses investor confidence based on actual activity patterns rather than by survey. As such it avoids the problem of survey participants talking their books or giving the answer that makes them look right. The fact that it has reached a five year high of 119.4 in July, up from 82.1 last October, must be a cause for concern.
The psychology is working like this. The global economy is in a big mess – this is true on a multi-year time frame. This fact became obvious enough to be factored into investor sentiment. The gloominess became overdone in investors minds and the market factored in a depression scenario. Actual portfolio positions were aligned, often via investors being forced to sell as the pain became too great in the sharp sell-offs of October 2008 and February 2009.
But even in the multi decade stagnation that we have embarked upon there will be periods of respite, especially when an unprecedented economic stimulus is thrown in. As this mini-recovery has taken hold sentiment, which took a long time to catch up with how bad things really are, has been taken by surprise again by the respite. Investors have generally been sceptical of the rally over recent months. In the initial stages there was universal consensus that all we were seeing was a bear market rally. More recently the mood has shifted more towards looking for a setback to buy. Now we seem to be toying with the idea that a genuine recovery is at hand.
We are not yet at the point where the bears have capitulated. The bulk of commentary still focuses on the negative. But once the market comes to fully accept the recovery scenario, we will be extremely vulnerable to surprises on the downside. This index suggests we are nearly there.