A sizeable majority of individual investors are worried about a possible U.S. stock market crash — and that’s bullish. That’s because crash anxiety is a contrarian indicator. It would be a bad sign if investors were confident that a crash would not occur. So we can take at least some solace from the current widespread worry about a possible crash.
You might wonder if crash anxiety is so high because it’s October, the month of the two worst crashes in U.S. history. But that can’t explain it. The latest reading is lower than all but three Octobers since 2001. We know this because of research conducted by Xavier Gabaix, a finance professor at Harvard University. After analyzing decades of stock market history in both the U.S. and other countries, he and his co-authors derived a formula that predicts the frequency of stock market crashes over long periods of time. The formula has worked remarkably well in the two decades since it was first published.