Barron’s Confidence Index points to bottoming of equities

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As often stated in my weekly “Words from the Wise” reviews, a confidence indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

barrons-pic-1

Source: Plexus Asset Management (based on data from I-Net Bridge)

Not surprisingly, a strong historical relationship exists between the Barron’s Confidence Index and the S&P 500’s 12-month rate of change.

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Source: Plexus Asset Management (based on data from I-Net Bridge)

The improvement in the Barron’s indicator augurs well for the outlook for equities – specifically for the return of confidence – and provides further evidence that US stock markets are in all likelihood mapping out a base development formation. However, in the short term I still maintain it is quite likely that markets could consolidate further and possibly retrace more of the prior gains.

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2 comments to Barron’s Confidence Index points to bottoming of equities

  • Henry Jasen

    I would like to see a 30 year chart of this one. It would seem to be a contrary indicator. That is, when the ratio is high, 80-95, then there is small reward for taking on extra risk, when it is low, 40-50, the reward is much greater for taking on the extra risk.

  • Henry: I unfortunately do not have older data for the Barron’s Index. Anybody who can help with this or a similar time series?

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