Tuesday, March 25, 2008

Consumer Confidence as a Contrary Indicator

Today's consumer results are spurring a lot of fear-inducing headlines, like:

"It's the Dispirit of '73: Consumers' expectations at low points since early 1970's"-Marketwatch

"Gloomy Data Damps Stocks"-Wall Street Journal

Consumer confidence, when looked at on its own, is often a good contrary indicator to stock prices. It is often a signal that prices have hit near-term lows. In our case, we have a lot of other data to look at, but this is positive news for stocks.

In a paper done by Ken Fisher and Meir Statman, they found that "low consumer confidence is followed by high stock returns more often than it is by low stock returns." They found that the correlation is too weak to be considered statistically significant, but can be quite useful when looking ahead at future stock returns and making decisions in regard to asset allocation.

The moral of the story here is don't get scared by poor consumer confidence numbers. It is often positive. The time to be scared is when consumer confidence is through the roof.

You can download their entire paper here.

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