Stocktake: Investors spooked by market decline

Stock market sentiment has plummeted following the correction. US equity funds recently recorded their third-largest weekly outflows, according to Bank of America Merrill Lynch (BAML).

The Yale Crash Confidence Index, developed by Nobel economist Robert Shiller, shows investors are more worried about a market crash than at any time over the past 20 years – even greater than the terrified reading recorded in early 2009 near the bottom of the bear market catalysed by the global financial crash.

Ordinary investors have been sceptical ever since this rally began in March, with bears now exceeding bulls in the weekly American Association of Individual Investors (AAII) polls for a record 31 weeks. That wariness has accelerated; there were almost twice as many bulls as bears in the latest AAII poll, with optimism experiencing its largest weekly percentage-point drop since June and falling to what the AAII calls “unusually low” levels.

Bull markets climb a wall of worry, so contrarians will be cheered that investors are so spooked. It all suggests the market correction is, as BAML put it, “healthy rather than dangerous”.