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Friday, March 31, 2017

MarkHulbert Opinion: Why soaring consumer confidence should worry investors

Opinion: Why soaring consumer confidence should worry investors
Published: Mar 30, 2017 5:40 p.m. ET

Stocks do better when shoppers are uncertain



By MarkHulbert Columnist

Far from the cause for celebration that an exuberant Wall Street assumes it to be, soaring consumer confidence is a source of concern.

And make no mistake; it is soaring. The Conference Board' consumer confidence index jumped to 125.6 in March, from 116.1 in February. That is one of the biggest one-month jumps in the history of the index, and was far higher than the consensus expectation of 114.1 among economists surveyed by MarketWatch. March's is the highest reading for the index in 16 years.

It's time to take profits in high-yield corporate bonds and buy high-yield municipals, says Sierra Strategic Income Fund co-manager David Wright.

Why is this concerning? Because the stock market in the past has performed better following low consumer confidence readings than in the wake of high readings. Consumer confidence's relationship to the stock market is a classic contrarian story, in other words.

That's certainly what I found upon feeding the consumer sentiment data into my PC's statistical software. The most statistically significant pattern is the relationship between consumer confidence and the stock market's performance in prior months. Consumer sentiment tends to rise after the stock market has turned in a strong performance, and vice versa.

This is well illustrated in the chart below. Though the consumer sentiment index plotted there is the University of Michigan's Consumer Sentiment Index, it is highly correlated with the Conference Board's consumer confidence index.


This correlation between consumer sentiment and trailing market returns helps explain what' going on now: The stock market has produced surprisingly strong returns over the past several months, and — sure enough — consumer sentiment has risen.

The real shocker, though, came when I measured the correlation between consumer sentiment and the stock market' subsequent return: The stock market did much better following particularly low readings than after high readings — as is summarized in the table below.

Dow’s return over subsequent

Following the 10% of months with the lowest consumer confidence index readings

Following the 10% of months with the highest consumer confidence index readings

3 months

2.8%

-0.9%

6 months

6.3%

-0.2%

12 months

11.9%

3.0%

So don't get caught up in Wall Street's excitement over the surprisingly strong consumer confidence reading. A sober reading of history suggests that, as it often does, Wall Street is interpreting the data in precisely the wrong way.

For more information, including descriptions of the Hulbert Sentiment Indices, go to www.hulbertratings.com or email mark@hulbertratings.com

http://www.marketwatch.com/story/why-soaring-consumer-confidence-should-worry-investors-2017-03-30?siteid=rss&rss=1

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