Contrary to what many analysts are saying, the recent significant declines in consumer sentiment and confidence are not portentous.
This is wonderful news for stock market bulls because consumers, who are thought to be the backbone of the American economy, have recently become considerably more pessimistic. Over the last three months, the Conference Board’s Consumer Confidence Index (CCI) has fallen 14.5 points, more than it has in all but 8% of months since 1979. Just 13% of months since 1979 saw a greater decline over the previous three months, compared to the 7.1-point decline in the University of Michigan’s Index of Consumer Sentiment (UMI).
Despite how large these declines are, there is little statistical evidence to support the idea that they cause subpar stock market performance. As you can see from the preceding table, the CCI really exhibits some minor contrarian characteristics. On average, the S&P 500 SPX has done better following significant three-month declines in the CCI.
Comparing Main Street and Wall Street
The disparity between the University of Michigan’s and the Conference Board’s sentiment indicators is a much greater reason for concern. This margin has historically increased significantly in the months preceding recessions. Given this historical trend, it should come as no surprise that the S&P 500 has underperformed following higher spread levels compared to lower ones.
As the accompanying figure shows, the spread is currently at extremely high levels, which is reason for alarm. Since 1979, when monthly data for both sentiment indices were available, the present spread has been larger than it has been in 91% of months. Higher spreads are associated with lower subsequent returns, and vice versa, in a statistically significant inverse relationship with the S&P 500’s subsequent 12-month return.
I call this disparity the “Wall Street-Main Street Disconnect,” as the UMI places a greater emphasis on survey participants’ confidence in their immediate personal financial prospects, whereas the CCI places a greater emphasis on respondents’ opinions about the economy as a whole. As a result, consumers are far less confident about their own performance in the upcoming months than they are about the overall state of the economy when spreads are as wide as they are currently.
Read: Americans are being forced to endure economic austerity by Elon Musk. That is not the way to success.
Indicators of overall economic health are holding up very well, despite the fact that many people express worsening prospects. That is exactly what we are witnessing today. The difference between stock owners and non-owners may be the largest. The former are optimistic about the numerous financial and economic hazards that are present in the modern world. In contrast, the non-stock-owning segment is preoccupied with more commonplace issues like the cost of eggs and the impossibility of ever being able to afford a home.
In summary, the recent drops in the University of Michigan’s and Conference Board’s indexes are not alarming on their own. However, there is unquestionably a difference between the two.
