Is consumer confidence good news for investors?

July 31, 2017

Keywords: Asset Management

If consumer spending represents as large a share of the U.S.' economic engine as experts say it does - approximately 60 percent - then the bull market has lots of room left to run, thanks to the overall sentiment buyers have been in for much of the year. But experts warn confidence isn't always an optimistic stock market indicator.

Several organizations chart consumer sentiment, and just about all of them indicate people are feeling better about the state of the economy today than they have in the past. In July, for example, the Conference Board's Consumer Confidence Index jumped to 121.1, up nearly four full points from 117.3 in June. The Expectations Index - which charts what consumers anticipate will happen growth-wise for the economy in the months ahead - also ratcheted higher, reaching 103.3 from 99.6.

Similar findings have been found in Gallup's analysis. In the polling firm's most recent Economic Confidence Index for the week ending July 23, the measure reached a plus-4, while the current conditions component of the analysis posted a plus-11.

Given that the Dow Jones Industrial Average has reached 29 all-time highs in 2017 - with the Standard and Poor's 500 as well as Nasdaq also shattering numerous records this year -  the good feelings many Americans share remains very much apparent on Wall Street.

Overzealousness can result in stagnation
But experts warn that when sentiment reaches a boiling point, it often presages a market correction. The Wall Street Journal's Ben Eisen noted how in the past, when sentiment has jumped to inordinately high levels, consumers often stagnate, comfortable with how things are and feeling no need to continue seeking improvement.

"People are pretty happy with the way things are," Eisen wrote. "That may be one sign that complacency is starting to set in - and that usually doesn't end well for the stock market."

What to keep an eye on
However, the Arizona Republic's Russ Wiles argues there are four factors that are more indicative of a potential stock market slide than consumer sentiment: Federal reserve policy, corporate conditions, the economy and stock market gains.

"There are pockets of weakness and other reasons for concern - signs of a tight job market are one - but the economy overall is in decent shape," Wiles wrote. "That's good for investors, as prolonged stock market declines rarely materialize unless a recession is near."

Wiles noted that the other factors have all exhibited signals at times this year that portend a bear market may be around the corner, but for the most part, those indicators have all been for naught. This includes the corporate sector, as stock prices for these businesses have been increasing at a pace that seemed unsustainable. However, Brian Schaitkin, the Conference Board's senior economist, noted that "elevated business confidence levels have helped non-residential investment growth slightly exceed post-recession trends."

Making sense of the economy and how it impacts asset management is much like a stew. All the ingredients have to marry together for it to come out right. But if one element isn't up to par, it doesn't ruin the entire batch.

At Miles Capital, we'll give you the recipe for success through our menu of strategic guidance that we've been providing for clients since our founding.

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