They ran the market up 170 points yesterday on a strong consumer confidence report. If consumer confidence was a good indicator, then we'd all be gazillionaires. Consumer confidence is, at best, a coincident indicator. That means it tells you how people are feeling now. It says nothing about how they are going to feel three months from now, let alone a year from now.
Extreme consumer confidence readings, both high and low, usually mark important turning points in the economy and the markets. If you look back at a history of these consumer confidence readings you will see what I mean. Here's a chart. I marked it up with market developments at the time and post these readings.
In January 2000 consumer confidence hit an all-time high of 144.7. The Dow Jones Industrial Average and S&P 500 peaked right at that time (Nasdaq two months later) and we went into a fierce bear market for the next two-and-a-half years. The economy went into recession and we only came out of it because of President George Bush's stimulus. That's the one where the government literally sent checks out to people. (Yes, that works.)
In February 2009 the consumer confidence number fell to an historic low of 25. Twenty-five!! That was the absolute bottom of the bear market, Great Recession, or whatever you want to call it. The Dow hit 6500. Did you sell there because confidence was low? If you did you sold in a hole so deep that you still are trying to crawl out from it.
There are so many more examples like that.
Confidence hit a 16-year high of 125.6 in March. So what? What does that tell me?
It tells me that people are oblivious to a lot of things going on in the economy right now. They're oblivious to the fact that economic growth has slowed for the last two quarters, and by a good amount. They're oblivious to the fact that gasoline demand -- a good barometer of economic activity -- is at recession levels. They're oblivious to the fact that the fiscal flows (i.e., government spending) are growing at half the rate they were growing the same time last year, and that rate was only capable of producing sub-2% growth. They're oblivious to the fact that corporate earnings are decelerating.
Why, then, are they confident? They're confident because they have jobs. That's great, but employment isn't even a coincident indicator; it's a lagging indicator. The economy kept losing jobs for eight months after the Great Financial Crash ended in March 2009. Better yet, the economy added over 1 million jobs in 2007, right before we plunged into the Great Recession. So, don't lean too much on the job numbers right now. The fact that they're making people feel good doesn't carry a lot of weight.
I use confidence as a contrarian indicator. I like to sell at extreme highs and buy at extreme lows. Is March's reading of 125.6 an extreme high? I cannot know for sure until after the fact, but right now I'm betting it is close. By the way, I sold in January 2000 and I was buying in late 2008 through March 2009 and beyond, when confidence was plunging. It worked out well. Very well. That's all I can tell you.