Blog - Investing Notes

October 21, 2004 – Does Consumer Confidence Predict Stock Market Returns?

Should we pay attention whenever pollsters issue new consumer confidence numbers? In their October 2002 paper entitled "Consumer Confidence and Stock Returns", Ken Fisher and Meir Statman examine whether consumer confidence, as defined and measured by the Conference Board and the University of Michigan, predict the stock market? They determine that:

• There is a negative relationship between the level of consumer confidence in one month and stock returns in the following month, but the relationship is statistically significant only for Nasdaq and small-cap stocks, not S&P 500 stocks. In other words, when consumer confidence is high, market returns for some groups of stocks over the coming month are lower than normal.
• There is a positive and statistically significant relationship between changes in consumer confidence and contemporaneous stock returns; high stock returns boost consumer confidence. In other words, when the market is up, consumers are happy; when the market is down, they are not.
• There is a positive and statistically significant relationship between changes in consumer confidence and changes in the sentiment of individual investors. In other words, when investors are happy, consumers are happy, and vice versa.

It seems that the first two items above taken together offer a tautology: when the market has been at a high, near-term market returns have been lower than normal; when the market has been at a low, near-term market returns have been higher than normal.

In summary, consumer confidence is not a worthwhile indicator for stock market investors and traders.

For related research, see Blog Synthesis: Sentimental Journey, encompassing a broad range of equity market sentiment measures.