What is the relationship between consumer confidence and the stock market? The first chart below shows the weekly closes of S&P 500 since 1975 and two popular monthly indexes of consumer confidence: The Conference Board’s Consumer Confidence Index, which dates from June 1977, and the Michigan Consumer Sentiment Index, which dates from January 1978. I’ve used the Excel Growth function to add exponential regressions through each of the three series to help us see when they were above or below the trend.
The next chart shows only the S&P 500, this time adjusted to the regression. Here we can easily see the magnitude of the Tech Bubble and the dramatic decline of the Financial Crisis.
Now let’s overlay the Conference Board’s Consumer Confidence Index, likewise adjusted to its regression trendline. As we can see, this index generally echoes the market, especially so during the Bubble and Crisis years. However, there are other periods with little correlation, for example, 1984-1986 and 1991-1995.
The next chart adds the Michigan Consumer Sentiment Index, also adjusted to its regression. The range of this index is less volatile than the Conference Board’s metric (lower highs and higher lows), but the two confidence measures cross their respective regressions in fairly close proximity.
Now let’s add the unemployment rate from the Bureau of labour Statistics. The numbers are shown on the right axis with the values inverted. Appropriately enough, the 6% level aligns with the regressions (the 0% level) of the left axis. Incidentally, 6% is also the median unemployment rate over the timeframe in the chart. The average (arithmetic mean) since the Bureau of labour Statistics began collecting that data in 1948 is slightly lower at 5.7%.
As we see, the two confidence measures are more closely correlated with the level of unemployment than the behaviour of the market. If unemployment remains high, consumer confidence will likely remain low. The major economic risk going forward is a spiral effect if nervous consumers continue to cut back on consumption. Fewer sales will lead to additional job losses as businesses see their revenues shrink. For additional insight on consumer behaviour, see my regular update on the Consumer Metrics Growth Index.
Historically unemployment has been a lagging indicator that moves inversely with equity prices (see the charts here). But a sustained level of high unemployment would pose a serious threat to the market recovery, now in its 19th month following the low set in March 2009. If high single digits become the new norm for the monthly BLS unemployment report, the Era of Boomer Consumption will be little more than a fond memory.