Market Analysis

Confidence Confusion

New data shows consumers have the blues. Will stocks follow their wallowing?

Story Highlights:

  • Various surveys show consumer confidence falling to 5-, 16-, and 34-year lows.
  • Confidence usually reflects current economic and market perceptions.
  • History shows consumer confidence moves with the market, but doesn't predict future returns.


How do you feel today? It's hardly breaking news consumers are feeling dour lately. We can see it in headlines and nightly news—and for many, perhaps in their own outlook. But dourness isn't just a feeling; it's captured in concrete data—a variety of sources produce widely followed indexes tracking how consumers feel. Not surprisingly, the official numbers reflect consumers' bleak psyches.

Consumer Sentiment Slips to 16-Year Low
By Rex Nutting, MarketWatch

US Consumers Most Pessimistic Since Nixon
By Angela Monaghan, The Telegraph

The first article details the University of Michigan/Reuters consumer sentiment index hitting its lowest level in 16 years. That's a long time ago! Must mean disaster's around the corner, right? Maybe, maybe not. What exactly was happening in 1992, the last time consumer sentiment was this low? The US was emerging from a recession then. Seems quite natural people would be gloomy—recessions can be trying. The second article uses a different measurement showing a five-year low in consumer confidence. (Another problem—which index should you believe? There are lots of ways to measure sentiment, but none are particularly better or more precise). Five years ago, we just suffered through a mild recession but a horrendous bear market, the worst since the Great Depression! And the US was on the edge of war with Iraq. Uncertain times? You bet!

But you should ask yourself, what happened afterwards? Did all that dour sentiment kill the market and signal recession? Not at all! The economy was recovering in 1992—not heading into recession—and stocks did fine. And quite obviously, both stocks and the economy boomed in 2003 and after. Consumer confidence isn't a reflection of what's going to happen; it's a reaction to what just happened and what's happening now—not a sign of what's to come.

History shows low consumer confidence doesn't mean stocks will drop and high confidence doesn't mean stocks will rise. For example, the University of Michigan survey peaked in early 2000—right before the bear market! Investors who bought stocks on that report were crushed. On the flipside, confidence bottomed in July 2002—just before the bear changed course. Don't be fooled though, confidence isn't a "contrarian indicator"—there are plenty of examples of confidence low points that didn't lead to booms and vice versa. It just means consumer confidence coincidentally moves up and down with the market. If stocks are rising, we're happy. If they're falling, we're gloomy—even over short periods. But those feelings provide no guidance as to what's coming.

When it comes to forecasting, confidence reports aren't meaningful for investors. Sure, investors today are justifiably gloomy—living through a big correction can be fatiguing—but those feelings don't presage future market direction. No matter how formal the index tracking, the latest data simply doesn't tell us whether stocks or the economy are headed for doom. Gloomy consumer confidence numbers might just be a sign it's time for some retail therapy.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.