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After reaching an all time low in January 2009, the Conference Board Consumer Confidence Index reached an all time low (again) in February 2009.
Although we haven’t seen such a dramatic fall in this metric for 42 years, historically, such troughs are signs of the coming of better times in the stock market. In fact, along with several other variables, gloomy consumer sentiment is one of the handful of conditions of a new bull market.
Now we are seeing an almost equally forceful recovery with the latest Consumer Index data from the Conference Board:
The last time we saw this kind of jump in the Consumer Confidence was in early 2003 - coinciding with the bear market’s end. The stock market certainly cheered when the surprisingly higher number was released by the Conference Board on Tuesday. And it is confirmed by other sources like the Gallup poll of US consumers showing a marked improvement since February 2009:
Source: Gallup Consumer Poll
So the question is, is such a sharp recovery in consumer optimism bullish for the market? or bearish?
In a recent column, Mark Hulbert argues that it is bearish. He compared the index with subsequent stock market returns (month, quarter, year, and 2 year periods). The relationship Hulbert found was an inverse one, where falls in Consumer Confidence lead to rallies in the market (and recoveries in Confidence lead to lower returns in the stock market). Given the contrarian nature of the crowd, this isn’t surprising.
But it isn’t the whole story.
James Stack, editor of the InvesTech newsletter and Jason Goepfert of SentimenTrader both focus on something entirely different. The Conference Board releases several different sub-sets of data. The one most people concentrate on is the Present Situations number but there is also the Expectations Index, which asks the respondents to look ahead to 6 months in the future:
They both keep track of another variable: the Expectations minus the Present Situation Index - in other words, the difference between how consumers think they will fare in the future and how they are doing right now. And interestingly enough, this net variable is actually positively correlated to the stock market - and a leading indicator.
I highly recommend both sources. To see the net Confidence chart take up their free trial offers:
You can get a free 14 day free trial of SentimenTrader.
And you can get a free sample of InvesTech’s newest report here.
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