High Consumer Confidence: Cause for Concern or Celebration?

Historically, happy consumers are not good news for equity investors.  After consumer confidence peaked in 1968, the equity market suffered a 70% inflation-adjusted loss over the course of the next decade and a half.  Following the consumer confidence peak in 2000, the equity market fell 50% over the course of the next two years.  It recovered before falling 60% and finally hitting bottom in 2009.

The flipside is that despairing consumers are often good news for equity investors.  The worst periods for consumer confidence – the early 1980s, the early 1990s and the immediate aftermath of the 2008 financial crisis— all produced spectacular returns for equity market investors in the years afterwards (Figure 2).

Not all consumer confidence peaks are followed by poor equity returns.  In the late 1980s, for example, the Conference Board indicator got to around 120 and the equity market mostly stagnated from 1990 to 1994, with price returns more-or-less matching inflation.  Nevertheless, the correlation between the level of the Conference Board Consumer Confidence index level and subsequent inflation-adjusted returns in equities is persistently negative, especially for returns 4-7 years in advance (Figure 3).

Having high consumer confidence doesn’t mean that equities will do badly in the next few months.  The correlation between consumer confidence and returns between one to 12 months in the future is weak.  As such, the fact of happy consumers doesn’t necessarily bode poorly for equity investors over the next year or two.  That said, it might not bode well for them over the course of the next 5-7 years (Figures 3).  Moreover, if consumer confidence continues to soar in 2018 and 2019, challenging or surpassing previous highs, it might indicate that the 2020s will yield inflation-adjusted equity market returns on par with those of the 1970s or the 2000s – in other words, markets where stocks consistently underperform inflation.  If so, that could increase the attractiveness of alternative investments such as Commodity Trading Advisers (CTAs) and global macro hedge funds, many of whom underperformed relative to stocks since 2009 but could generate strong returns in markets where equities suffer.

Recently, the Conference Board Consumer Confidence Index has been hovering around 130.  Historically, those levels were consistent with stock price returns that underperformed inflation by about 20% over the next six years (Figure 4).  The historic range was anywhere from about 40% lower to around 10% higher in inflation-adjusted terms. So, if we have 2% inflation per year and the S&P 500® is trading at around its current level in 2024, remember: you heard it here first.