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Investor Confidence Rises for Institutions, but Individuals Disagree

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The Dow has once again retreated from 18,000, but if State Street’s investor confidence index is predictive, it could soon top that psychologically important level.

Confidence among North American institutional investors soared in March, up 30 points to 135.4, according to the latest State Street Investor Confidence Index. Confidence among European and Asian investors, however, fell slightly, with Asian investors actually turning negative on buying risky assets.

The State Street index is based on actual trading data of institutional investors and equates increases in equity allocations with an increase in investor confidence. Any measure above 100 indicates a higher risk appetite for equities and other riskier assets.

Confidence among North American investors increased the most because of “reduced short-term interest rate forecasts for 2015 and 2016 by the Federal Reserve and the commencement of sovereign quantitative easing by the European Central Bank,” Kenneth Froot, one of two developers of the index, said in a statement. But he warns that “market setniment, like the Federal Reserve, will likely be highly data dependent over the next couple of months.”

While institutional investors may be more optimistic about the stock market, affluent individual investors are not. The Spectrem Group’s investment preferences survey for March shows that affluent investors in the U.S. — defined as those with $500,000 or more in investable assets — expect to buy fewer stocks than they did the month before. They were also likely to invest in cash. The only category that showed an increase was the “Not invest” category, suggesting a holding pattern among investors. The survey is based on monthly interviews with 250 investors.

“While the market continues to reach historic highs, there is continued investor concern about an adjustment,” said George Walper Jr., president of Spectrem Group, in a statement. “This, in part, is driving affluent investors away from equities for the short term. The number who indicate they will be holding on the sidelines increased in March.”

Investors are concerned about increasing volatility in the stock market, exemplified by the frequent triple-digit declines in the daily Dow trading and uncertainty about when the Fed will raise interest rates, according to Spectrem. Non-millionaire affluent investors were more pessimistic than those with $1 million or more in investable assets.

That’s not necessarily the case in Canada, where households are feeling financially comfortable, according to a survey by CPA Canada. But the survey found that more than half of households weren’t saving or paying off debt on a regular basis, and half had not established a reserve fund for emergencies.

— Check out Bernanke: Low Rates Are the Long-Term Trend on ThinkAdvisor.