- Consumer confidence fell in February. But low and high confidence often portend the opposite for stocks going forward.
- Consumer expectations look backward and, after a downturn, that effect is compounded by another lagging indicator—unemployment.
- Negativity little affects real spending habits in the economy. Business investment caused the lion's share of the decline and should continue driving recovery.
Our economy is a vast web of interconnected actors—buying, selling, working, playing—and their activities drive macroeconomic growth. Of all that economic activity, the vast majority (about 70%) is thanks to a particular kind of economic actor—the consumer. Whenever that powerful beast speaks, headlines would have us listen, particularly when its confidence is falling. Seems reasonable—but does falling consumer confidence really mean something wicked this way comes?
Turns out confidence surveys don't make for good conversation. Sometimes, negative consumer expectations portend the exact opposite for stocks going forward. The lowest confidence reading in over forty years was last February—and March was only marginally higher. Did those readings bode ill for stocks? Hard as it was to see then, stocks were poised to charge higher—dramatically—through the rest of the year. The same is often true in reverse. Consumer confidence crested at the peak of the last bull market and similarly peaked in 2000. Those high readings certainly didn't predict good times for stocks or the economy.
So maybe we should sell when confidence is high, buy when low? Hindsight is 20/20, but turns out it's difficult to determine just what confidence is telling us in the heat of the moment—it's often fickle and apt to overreact. Confidence regularly backs up during bulls, temporarily recovers during bears, and peaks and bottoms all over the map. In the 2000 bear market and recession, consumer confidence peaked far above the previous downturn's peak, while the most recent bear peaked far below the 2000 high. A similar trend is true for the last two bear troughs—confidence bottomed higher and then far lower than the previous bears. There's simply no way to know when high is too high or low is too low.
Worst of all, confidence looks backward and, after a downturn, that effect is compounded by another lagging indicator. High unemployment virtually guarantees those being surveyed have an emotional stake in the matter—they're either unemployed themselves or know someone who is. Naturally, those emotions tend to accentuate lingering negativity. Unfortunately, unemployment lags economic recovery even more than consumer confidence.
Consumers may not be great at predicting what's to come, but a common belief holds that their negativity translates into weakening consumer spending—and that inevitably imperils the economy. Well, maybe. But even plummeting consumer confidence in late 2007 and throughout 2008 only resulted in a consumer spending decrease of -1.2%.
Turns out, good times or bad, consumption is steadier than widely believed. That makes what consumers do or don't do far less important than their economic weight suggests. When it comes to the economy's ups and downs, business spending tends to be more important. And as we've said, business investment caused the lion's share of the decline and should continue driving recovery.
What then should we make of consumer confidence? When times are good, folks expect them to continue. And when they're bad—the same. Neither attitude is a great way to approach investing.