Wednesday, October 29, 2008

The Consumer Confidence Index and the Stock Market

One closely followed economic indicator is the consumer confidence index (CCI). It is a survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy currently and in the near future. The report came out October 28 with its lowest reading EVER at 38, down 61% from the September reading. Remember, the highest rating ever was in January 2000, at 145. If you remember correctly, this is about the time when (think Level 3) was trading at a multiple of last year’s reported earnings that will never be duplicated. The S&P 500 Index has since shed more than 1/3 of its value. My question is, how good are we consumers at judging the health of the economy or the stock market.

Since we are now at a historic low in the CCI, I wanted to see how the market (S&P 500) historically fared when the CCI was at several different multi-year lows. The results may surprise you.

· In December 1975 the CCI was 43. The S&P on 12/15/75 was 90. 1 year later it was 105, returning 17%
· In October 1982 the CCI was 54. The S&P on 10/15/82 was 134. 1 year later it was 170, returning 27%
· In February 1992 the CCI was 47. The S&P on 2/15/92 was 413. 1 year later it was 445, returning 8%
· In July 2003, the CCI was 77. The S&P on 7/15/2003 was 991. 1 year later it was 1111, returning 12%

A year from these 4 multi-year lows, the market gained on average 16%, well above historical average returns for any major US stock market index.

Without further research, I can’t say how strong the correlation is between these two variables, but as my simple example showed, it may be a contrarian-type figure worth looking at when deciding on entry/exit points in or out of the market. For me, it re-affirms my belief that money put to use in US equities now or in the near future will yield above average returns.

Aaron Konen

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