Opinion: Why Consumers May Not Be In The Mood To Help The Economy Or The Stock Market

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The Conference Board’s Consumer Confidence Index (CCI) registered one of the largest jumps in its history in March, with 21.3%. That would appear to be unambiguous economic good news. But meanwhile, the University of Michigan Consumer Sentiment Survey in March was up 10.5%, less than half. Some analysts believe that this divergence puts a much less optimistic interpretation on the impressive rise of the ICC.

Divergences between these two respected measures of consumer sentiment are relatively rare. Consider the correlation coefficient between the 12-month exchange rates of these two indices. This coefficient varies from a theoretical maximum of 1.0 (in the case that the 12-month exchange rates of both sentiment measures are perfectly correlated with each other) to a theoretical minimum of minus 1.0 (in the case that the two measures are move each one exactly inversely). another, rising one when the other falls, and vice versa). Since the late 1970s, which is the earliest date for which monthly data are available for both indices, the correlation coefficient is extremely high (and statistically significant) at 0.82. This normally high correlation is one of the reasons some analysts think it is significant when the two indices diverge. Another reason: divergences don’t seem to happen randomly but tend to follow the market cycle, and extreme divergences often precede a recession. I got this information from James Stack, editor of the Investech Research newsletter. One of the many indicators it focuses on is calculated by subtracting the Conference Board Consumer Confidence Index from the University of Michigan index. Currently, for example, this indicator stands at minus 24.8. (Full disclosure: Stack’s newsletter is not one of those that pay a flat fee to my auditing company to calculate their history.) The table below provides historical context. The latest divergence is less than 86% of the readings for other months since the late 1970s. The graph also shows the dates of recessions on the calendar maintained by the National Bureau of Economic Research, the semi-official arbiter of when they begin and recessions end in the US Notice how the gauge typically hits a low several months before recessions start. .

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It is in this context that the jump in consumer sentiment indices in March takes on less than bullish significance. During the few months leading up to March, as you can see from the chart, the divergence between the two indices had returned near the zero line, which is typical of their pattern coming out of recessions. Rejecting again, the divergence challenges the widespread narrative that the US economy is poised to surge as the country emerges from pandemic-induced lockdowns. Chart readers might even see a parallel between the divergence’s unexpected turn to the downside and its behavior after the first of the double-dip recessions of the early 1980s. The divergences between these two consumer indices are due to subtle differences in what they measure. Stack has noted that the University of Michigan survey emphasizes more consumer attitudes toward their immediate personal circumstances, while the Conference Board index more strongly reflects consumer attitudes toward the overall economy. Negative divergences, like the most recent reading, mean that consumers are more optimistic about the US economy than about their own personal situation. Mark Hulbert is a regular contributor to MarketWatch. Your Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com More: The One Word That Explains Why Inflation Fears Are Off Base Plus: Why the ‘Fed Put Option’ Makes Low Volatility Stocks a Replacement attractive for bonds