The passing of a crisis can have one of two effects on people's confidence. It can make them more attuned to the dangers they face, or it can leave them more confident.
The six months since Sept. 11, during which the economy was declared to be in recession and Enron collapsed, seem to have had roughly opposite effects on individual investors and the professionals who run large stock funds.
Individuals have emerged newly optimistic about the stock market, with many believing that any fall in prices will be only temporary and that the market is now fairly valued or even undervalued. Institutional investors have become more nervous than they had been about the risks of a market that remains near a record high, relative to corporate earnings.
These are the results of a monthly survey of investor sentiment to be released on Tuesday by the Yale School of Management. Its architect -- Robert Shiller, the author of Irrational Exuberance (Princeton University Press), a bearish book that appeared just before the market's peak in 2000 -- calls the survey, which began in 1989, the oldest continuing study of investors' attitudes.
Those attitudes are important because they can help predict where the market is headed. The optimism of individuals, despite the recent jitters of professional investors, suggests that the coming year could be a good one for stocks, for example.
But the survey can also serve as a reality check. The long run-up in stock prices since the 1987 crash has left many investors thinking that any decline in prices will be only brief, and the comeback of the market since Sept. 11 confirmed that notion to many people, said Shiller, who teaches economics at Yale. History, however, suggests that stock prices can remain stagnant for years at a time.
The Standard & Poor's 500-stock index closed on Monday at 1168.26, up fewer than four points but still good enough for its fifth increase in the last seven trading days, as a series of economic reports have suggested the recession is ending. Since the steep market fall just after the Sept. 11 attacks, the index has climbed more than 20 percent. The major indexes are considerably higher than they were at the close of business on Sept. 10.
Over the same span, the percentage of individuals who say that the market is fairly valued or undervalued has actually risen slightly, from 58 percent to 62 percent. But based on projected corporate earnings, stocks are more expensive today than they have been for nearly all of the last century.
The most telling change may have come in people's predictions about what would happen after a significant fall in the market. Many economists consider the performance of stocks from one day to the next to be independent.
Absent any other information, however, almost 80 percent of amateur investors now say the market would rise the day after a big drop, according to the Yale survey. Last summer, about 60 percent offered this optimistic answer. In 1990, fewer than 50 percent did.
The shift is hardly irrational, given the market's performance after the 1987 crash and 2001 decline. "We've been through a period of 20 years when the market has always rebounded," Shiller said. "People think it's a lesson for the ages."
Their confidence comes despite investors' simultaneous belief, after Sept. 11, that a crash is more likely than it was at any point during the last decade, according to the survey. Individual investors simply think the market will quickly rebound from whatever turbulence that it hits.