Quick Bites | Consumer Confidence and the Stock Market

It is always interesting to contrast movements in the stock market with the way people feel. The chart below, sourced from JP Morgan, tracks US Consumer Sentiment, and the subsequent 12 month returns from the major index in the US, the S&P 500. As the contrarian investors amongst us might have guessed, 12 month returns of the market are highest when the consumer sentiment index is at its lowest.

Put into numbers, when sentiment is at a trough, the subsequent market return has averaged a very enticing 24.9%! When sentiment is at a peak, on the other hand, the subsequent market return sinks to a rather unappealing 4.1%.

Why might this be? When sentiment is very weak, this usually coincides with a weak share market. As sentiment bottoms and starts rising, prospects for company profits start rising and the market follows. But knowing when the bottom is actually in place is only evident in retrospect.

So where are we now? Consumer sentiment in the US is weak, and if the historical pattern is maintained, this should bode well for market returns over the next 12 months. Similar patterns would be likely in the Australian context. Of course, there is no certainty that this time might not be different – that’s why forecasting share market returns is so dangerous and fraught with error. Markets are great for humbling over-confident forecasters.

Source: JP Morgan

 

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