I’ve had at least two clients say that what’s needed is a restoration of Consumer Confidence. That may be true with respect to the economy, but it’s decidedly untrue when it comes to stocks. If you want to own stocks, you should try to buy them when consumer confidence is terrible. After the Read the rest . . . , you’ll find an intriguing chart from Ned Davis Research, reproduced with the firm’s permission.
The chart below features two plots going back to 1967. The lower plot is the Conference Board’s Consumer Confidence measure. The upper plot is the Dow Jones Industrial Average. In the upper left-hand corner is a table showing the annual gains for the Dow when consumers are categorized as one of three categories: optimistic, neutral, pessimistic. When consumers are least confident, subsequent DJIA returns are the best. When consumers are most confident, returns are worst.
Ned Davis Research has a tenet about crowd sentiment. It says go with the flow until it reverses course. In the case of consumer confidence, this model won’t trigger a buy signal until confidence improves to about 66, but I think the point is made that when it comes to stocks and consumer confidence, bad is good.
One last thing, please notice how precisely the model caught the absolute top in the Dow in 2007, and the other sell signals–and buys for that matter–weren’t too shabby.