That’s because the stock market in the past has tended to do better following big drops in consumer confidence than after large jumps. And the latest data show a big jump indeed: The Conference Board reported earlier this week that its U.S. consumer confidence index climbed in May to a five-year high, jumping 7.2 points from the revised April index level, which itself was revised upward from its initial reading.
Another report two weeks ago, this one from the University of Michigan and Thomson Reuters, reported consumer sentiment rising to its highest level in six years.
I know it strikes many as counter-intuitive to worry about a big jump in consumer confidence. But that’s what I am doing after analyzing the Conference Board’s Consumer Confidence Index over the last three decades. Specifically, I correlated each month’s change in that index with how the stock market performed in subsequent months.
The biggest monthly jumps in the consumer confidence index were, on average, followed by sub-par returns. Conversely, big drops in the index were typically followed by above-average returns.
The most robust statistical patterns in the data, however, arose when I measured the impact on the consumer confidence index of the stock market’s performance in prior months. I found that the index tends to rise following periods in which the stock market is strong, and vice versa.
So, given that the stock market is surging to successive new all-time highs, it is not a huge surprise that consumer confidence would strengthen.
Following the lead of the consumer confidence numbers is therefore like driving by looking in the rear view mirror. Consumer confidence tells us more about how the stock market has already performed than it does about the future. But insofar as consumer confidence tells us anything about the future, it’s that stronger readings are more negative than positive for the stock market.
For example, the lowest consumer confidence index reading in recent years occurred in — you guessed it — early 2009, right as the terrible bear market that began in Oct. 2007 was nearing its end. The index’s reading then was at 25. Today’s reading of 76.2 — more than three times higher — comes after one of the most powerful bull markets in history.
In similar contrarian fashion, you probably can guess when over the last 25 years the consumer confidence index reached its highest level. That’s right: Early 2000, just before the Internet bubble burst.
No wonder contrarians consider consumer confidence to be a great contrarian indicator.
Further support for a contrarian interpretation of the consumer confidence data, should you want to pursue the matter further, comes from a 2002 study by Kenneth Fisher of Fisher Investments and Meir Statman, a finance professor at Santa Clara University.
The bottom line? Don’t get carried away by the apparently good news that consumer confidence is at its highest level in five years.
[by Mark Hulbert, writing for MARKETWATCH]
As always, posted for your edification and enlightenment by
NORM ‘n’ AL, Minneapolis