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Every week Barron's computes and publishes its Confidence Index. The editors define it as the ratio of the yield on high-grade bonds divided by the yield on intermediate-grade bonds. Think of it as measuring the confidence investors have in the financial system. Naturally investors need a higher yield on the riskier intermediate-grade bonds than they do on the higher rated bonds. If the two yields are very close, say high-grade is 95% of intermediate-grade, investors have confidence in the system and the ability of intermediate-grade companies to honor their payments. But if there is a wide yield gap, say the yield on higher-grade bonds is only 60% of the much higher yield on intermediate-grade bonds, investors would be showing little confidence in the financial system and intermediate-grade companies’ abilities to honor their payments.

Figure 1.4 shows the Confidence Index from December 29, 1978, through February 21, 2020. The straight line represents the average reading for three different time periods. It averaged 93.2 from December 29, 1978, through December 31, 1999. Then it dropped and averaged 83.5 from January 7, 2000, through December 31, 2008. From January 2, 2009, through February 21, 2020, covering the eleven-year bull market and a couple of months before it began, it averaged only 73.5. This recent bull market took place in a setting of low investor confidence in the financial system.

Figure 1.4 Barron's Confidence Index, 12/29/1978–2/21/2020

We contend an investor's confidence affects how he or she receives and processes news. If confidence is high, bad news might get dismissed or softened in its perception. If confidence is low, bad news is on the fast track to negative sensors. During this bull market, investors were viewing the glass as half empty. In this state, they were overly sensitive to mediocre and bad news, with good news or bullish indicators flying under their radar. It is almost as if they were screaming, “Don't tell me facts, I'm too scared to listen.”