Bear Mountain Bull

…on consumer confidence. BMB has always said that consumer confidence is a lagging indicator (coincident at best), and follows the stock market — not the other way around.

Mark Hulbert agrees:

…the stock market’s reaction would certainly appear to be quite rational. Won’t more confident consumers spend more money, thereby jumpstarting the economy — and, in turn, propelling the stock market ever higher?

Intuitively appealing as this argument appears, however, it receives little support from the historical data.

To find out what the historical record can teach us, I analyzed the Conference Board’s consumer confidence index back to 1977, which is when this research firm started updating this index on a monthly basis. I then compared each of the index’s monthly readings over this three-decade period with how the stock market performed over the subsequent month, quarter, year, and two-year period.

The biggest monthly jumps in the consumer confidence index were, on average, followed by sub-par returns. Conversely, big drops in the index were typically followed by above-average returns.

The starkest patterns in the data, however, were between monthly changes in the consumer confidence index and how the stock market had performed in prior months. When the stock market is going up, their confidence rises too — and vice versa.

So, given the stock market’s impressive rally over the last couple of months, it was entirely to be expected that consumer confidence would rise smartly.

In other words, focusing on consumer confidence tells us more about how the stock market has performed in recent weeks than it does about the future. But insofar as consumer confidence tells us anything about the future, it’s that big rises and/or high readings are more negative than positive for the stock market.