Trusts in Financial Institutions and Asset Valuations

We examine the role of American household trust in U.S. financial institutions on valuations of stocks, treasuries, bonds, real estate, and gold. We investigate how trust in banks, mutual funds, financial markets, large corporations, and overall financial trusts impacts returns/yields of the following six assets: U.S. treasury bills, U.S. treasury bonds, S&P 500, corporate bonds, gold, and real estate. The results of the six separate regressions suggest that stocks, gold, and real estate are significantly impacted by American people's trust in the banking sector, large corporations, and the financial market to a varied degree of strength. Trust in the banking sector significantly and positively impacts both the S&P 500 and real estate prices. The highest impact on the S&P 500 returns is the financial trust in large corporations. Similarly, gold prices are significantly negatively impacted by trusts in the financial markets suggesting its role as a safe-haven asset. On the contrary, U.S. treasury bills, treasury bonds, and corporate bonds are insignificantly impacted by all categories of financial trusts in institutions. We argue that financial trusts play an important role in the valuations of risky assets and less for safer assets that are guaranteed by the U.S. government. We also find that there exist lead-lag relationships between financial trust and asset returns. Trusts in financial institutions is significantly impacted by lagged movements in the stock market, housing market, and treasury bill yields. Movements in risk-free rates are possibly one of the major determinants of financial trust in all institutions.