MW Will consumers' gloomy outlook take the bloom off the stock market?

By Mark Hulbert

What current consumer-sentiment readings really mean for stocks

The recent large drops in consumer confidence and sentiment are not the bearish omens that many commentators are claiming.

That's good news for stock-market bulls, since consumers - considered the engine that powers the U.S. economy - have of late become much gloomier. The Conference Board's Consumer Confidence Index $(CCI)$ over the past three months has dropped 14.5 points, which is a bigger drop than in all but 8% of months since 1979. The University of Michigan's Index of Consumer Sentiment $(UMI)$ has dropped 7.1 points; only 13% of months since 1979 experienced a bigger drop over the trailing three months.

Big as these drops are, there is no statistical support for the belief that they lead to poor stock-market performance. In fact, the CCI has some slight contrarian properties, as you can see from the table above. The S&P 500 SPX on average has performed better after big CCI three-month drops.

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Wall Street vs. Main Street

A far bigger cause for concern is the gap between the Conference Board's and the University of Michigan's sentiment measures. Historically, this spread has widened considerably in the months prior to recessions. Not surprisingly, given this historical tendency, the S&P 500 has performed worse in the wake of higher spread levels than lower ones.

This is cause for concern because the spread is now at very high levels, as illustrated in the accompanying chart. The current spread is greater than in 91% of months since 1979, when monthly data for both sentiment indexes became available. There is a statistically significant inverse correlation between the spread and the S&P 500's subsequent 12-month return - with higher spreads correlated with lower subsequent returns, and vice versa.

I refer to this spread as the "Wall Street-Main Street Disconnect," because the CCI more heavily weights survey respondents' views about the economy in general while the UMI more heavily weights respondents' confidence about their immediate personal financial prospects. Large spreads such as those seen today therefore mean that consumers have far less confidence about how they personally will do in coming months than they do for the economy in general.

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That is indeed what's were seeing today, with the indicators representing broad economic health holding up relatively well even as a large percentage of individuals report deteriorating prospects. Perhaps the biggest disconnect is between those who own stocks and those who don't. The former are sanguine about the myriad economic and financial risks that exist today. The non-stock-owning group, in contrast, is focused on more mundane concerns such as the price of eggs and the difficulty of ever being able to afford a home.

The bottom line: By themselves, the recent declines in the Conference Board's and the University of Michigan's indexes are not a cause for concern. But the spread between the two is definitely so.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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Also read: Trump to ratchet up China tariffs again. Here's why American consumers will feel the pain this time.

-Mark Hulbert

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February 28, 2025 15:01 ET (20:01 GMT)

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