If you want to have better insight into how the asset markets work, you need to be aware of the relationship between investor confidence and the price movements of different securities.
When active traders and other market participants feel generally optimistic about the future direction of the global asset markets, this sentiment will be reflected as they move toward riskier securities that offer high potential for returns. An example of this is the preference that global investors frequently display for stocks, commodities and other riskier assets when the global economic conditions are considered positive.
Investor confidence measures
There are many different indices that are harnessed to measure the confidence of global investors. For example, State Street Global Markets, which performs research and also executes trading for major financial services firm State Street Corporation, produces its State Street Investor Confidence Index®. The index rose by 8.7 points to 94.8 in February from 86.1 in January.
In addition, the 2013 version of an annual survey that asked high net worth investors how confident they are about the asset markets over the next 12 months indicated that 53 percent of respondents believe the value of global securities will rise during the period, according to IFAonline.
In March, the Dow Jones Industrial Average broke past its all-time high set in 2007. In addition, the benchmark S&P 500 Index, which contains the stocks of some of the largest publicly-traded corporations, was close to reaching a new record at the time of report.
When investors feel less confident about the future performance of the asset markets, they frequently flee to less-risky assets such as bonds and cash equivalents. A perfect example is the robust demand for debt-based financial instruments that market participants exhibited during the last five years.
The Great Recession caused widespread doubt and even panic in some market participants, and their fear caused them to prioritize keeping their principal - the original amount they invested - safe. Assets such as cash equivalents and bonds frequently offer little risk to this principal, but on the other hand the returns they generate often fall behind those produced by stocks. The yields on Treasuries were driven to record lows amid this widespread risk-off trading.
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