- US consumer confidence is at its strongest level since 2000, according to the Conference Board’s most recent survey.
- Such peaks in confidence have preceded previous recessions, and some market watchers are worried about what happens this time.
- There’s no “magic” peak that confidence must hit before it starts rolling over, so it’s possible that consumers haven’t yet experienced the best of this economic cycle.
Americans haven’t felt this good about the US economy since 2000.
That’s what the Conference Board’s latest report on consumer confidence found. The September index released on Tuesday jumped to 138.4, “not far from the all-time high of 144.7 reached in 2000,” the research group said.
It was an encouraging sign of where the economy stands 10 years after the Great Recession. President Donald Trump even gloated about it on Twitter as “a big jump from last 8 years” even though it has been trending higher.
But because what goes up eventually comes down, some economists and strategists are worried that this level of consumer confidence portends a downturn.
Rosenberg specifically flagged the link between exuberance on Wall Street and Main Street.
As market cycles go, euphoria marks the peak before the big tumble. And with the stock market and consumer confidence hovering near all-time highs, Rosenberg is concerned. About 43% of the Conference Board’s survey respondents said they were bullish on stocks, nearly double the 22.4% share of bears.
“To show how the Conference Board consumer confidence survey has become nothing more than a poster child for stock market sentiment over time, their correlation has soared to 81% in the past decade,” he said. “The correlation over the last 4 decades is only 51%.
John Hussman, the president of Hussman Investment Trust who Business Insider has described as the stock market’s biggest bear, flagged this concern even before the new consumer-confidence print for September.
“There’s most likely a feedback [loop] here – the strong performance of the market may help to boost consumer confidence, and strong consumer confidence may help to support the market,” Hussman said in a September 3 post.
“The feedback may be self-reinforcing over short periods, but mean-reversion clearly dominates over the economic cycle, as investors fluctuate between extremes of optimism and extremes of pessimism.” This, combined with what Hussman describes as unfavorable market internals, have opened a “trap door below the market.”
Albert Edwards, the ever-bearish strategist at Societe Generale, also wrote about “extreme optimism” in his client note on Wednesday.
“The US consumer has gorged on optimism until they are fit to burst,” Edwards said. “This is as good a contrary indicator as technical indicators such as put/call ratios.” These show the relative bets that options traders are making on higher or lower stock prices, and can indicate when buying or selling are at extremes.
There’s no magic level
Rosenberg observed that a recession began seven months after confidence peaked in 2000.
So, is another recession coming? There’s no magic level of confidence that answers that question, according to Neil Dutta, the head of economics at Renaissance Macro.
“If there was a magic level, we would [see] recessions start around those points,” he wrote on the chart below. “Instead, recessions start a [sic] different levels of confidence.”
What the chart also shows is that confidence usually peaks before recessions. That makes intuitive sense: the economy eventually gets worse after it’s been very good, which is why an 18-year high on consumer confidence is startling the recession watchers once again.
The more difficult question is how much higher confidence can climb before it peaks ahead of the next, inevitable recession.
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