Market Analysis

The Exclusionary Economy (Everyone but Me!)

As sentiment plunges toward multi-year lows, positive economic news continues to flow in—a uniquely bullish scenario for stocks.

Story Highlights:

  • The last three days featured a plateful of good news, and the general reaction has been denial—an extremely bullish sign.
  • Headlines and official sentiment indexes alike are hitting multi-year levels of pessimism. But neither have ever been good economic indicators.
  • Stock investors who stick with the fundamentals and ignore the hype are likely to see big rewards.


Today is one of those days you really love to see as a stock investor. Coming off the largest two day market rally in five years, a third quarter GDP revision up to an eye-popping 5%, and an actual new home sales gain last month…folks responded with near ubiquitous pessimism and denial.

White House Lowers '08 Economic Forecast
By Jeannine Aversa, The Associated Press via Washington Post

GDP: Hot, It's Not
By Jerome Idaszak, Kiplinger

Even a seemingly positive headline like this one takes a turn for the dour:

Economy Grew 4.9% Last Summer
By The Associated Press via The New York Times

We quote: "The performance was the strongest in four years, but isn't expected to last through the current quarter amid the continuing housing slump and credit crunch." In our view, this represents the overwhelming majority of reaction to today's GDP news.

But this phenomenon isn't confined to anecdotal headlines. Oft-cited consumer confidence indexes—widely used as leading indicators for the economy—have plummeted since summer.

The US Consumer Confidence Index (CCI) is issued monthly by The Conference Board, an independent economic research organization. The CCI is believed to be indicative of consumer consumption levels looking immediately ahead. Since June, the CCI has tanked. Topping out at a high of around 115 earlier this year, it now sits below the 90 mark.

Another popular sentiment indicator is the University of Michigan's Consumer Sentiment Index. This measurement sank to its lowest level in two years (76.1 in November versus a reading of 92.1 a year ago). Many analysts say this number "indicates consumer spending growth will nearly come to a halt in the closing months of 2007 and in the first few months of 2008."

(Editor's Note: for a more in-depth explanation of how to read sentiment indexes, please see the links provided at the end of this commentary.)

Those dour forecasts are already proving themselves untrue based on robust holiday sales numbers in physical retail stores and online so far. Such sentiment indexes are consistently used in economists' prophesying—but we often have trouble seeing why. If advances in the neurosciences and behavioral finance have taught us anything, it's that how folks feel and how they act are often two discrete things.

What we want to make clear is investors—pervasively—are operating under the premise the economy is headed for dire straits. Unquestionably at this point dour attitudes are being rationalized in spite of positive news.

For those brave bullish souls who've remained stalwart these last months, the news couldn't get any better. This kind of divergence from reality doesn't come along but once in a blue moon, and means great opportunity for investors.

When we speak anecdotally to other investment professionals and average investors alike, we consistently hear "it's pretty bad out there." But when we inquire how their specific situations are, it's always, "Oh, well things have been great for me this year, but the rest of the economy is suffering. I'm one of the lucky ones."

Call it the Exclusionary Economy—where everyone seems to think everything is bad…except of course for themselves! Today's cartoon in the Wall Street Journal sums it up nicely: A couple is at the mall, arms filled with bags of holiday purchases, but both look melancholy. The caption reads: "Well, someone has to have enough consumer confidence for the both of us." (

Now, as always we employ a bit of hyperbole here to make the point. Different parts of the economy are always moving up and down, and undoubtedly there are areas where things aren't great. But in aggregate it's exceptionally rare to see such broad economic strength coupled with abysmal sentiment. Really, save a few woebegone lenders, it's difficult to argue Wall Street is truly suffering—the sector is set to have its second most profitable calendar year ever!

Maybe it happens today, next month, or next year. But those staying disciplined and bullish through this uncommonly dour time will eventually be rewarded.

And if this doesn't say it all, nothing does:

Consumers Cry All the Way to the Mall
James Pethokoukis, US News



November 2007 Consumer Confidence Index. The Conference Board

Reuters/University of Michigan Survey of Consumers: November 2007

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