INSTITUTIONAL PSYCHOLOGY REMAINS BULLISH

Institutions are beginning to favor equities again according to the latest data out of State Street.  Investor confidence moved higher in December to 103.9 from the previous reading of 100.8.  This shows that institutions still favor risky assets.  This reallocation of capital has been most apparent during the rally and the recent tapering off of confidence explains much of the sideways movement in equity markets over the last few months.  This data is corroborated by recent data we presented from the CFTC which shows small speculators are bearish while large speculators remain bullish.

Ken Froot, the co-founder of the index explained the recent performance:

“This month’s up-tick in global investor confidence stemmed largely from an improvement in the mood in Asia, where risk appetite rose to an eight-month high.  Elsewhere portfolio reallocations were modest. With three of the four indices over the neutral level of 100, institutions are continuing to add to their risky asset positions, but at a slower pace than was evident earlier in the year. Investors will be watching for signs of renewed economic growth, and well-designed exit strategies from policy makers, before making more significant reallocations towards risk in 2010.”

Paul O’Connell added his thoughts on the full year performance and prescience of the index:

“For the year as a whole, investor confidence staged a meaningful recovery from the historic lows of twelve months ago, leading the way ahead of other measures such as equity prices, consumer confidence and surveys of investor expectations.  By quantitatively measuring the actual risky asset allocations of institutional investors, the State Street Index shows that institutions were ‘ahead of the curve’ in anticipating the risk rally this year.”