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High Consumer Confidence , A Warning Sign For Investors

United StatesA lot of consumers in the United States are happy about the condition of the economy and as a result are spending more and are fueling the economy. The trouble is that historical patterns show that periods when consumer confidence is high is usually followed by periods of lower returns for investors.

The numbers for the level of consumer confidence have been released by the Conference Board, who has an index for consumer confidence. Currently, the level is at 138.4, which is the highest it has been in 18 years. The level is also pretty close to the all-time high of 144.7.

The states released by the Board come as a big surprise for many economists. In polling, many of them predicted that consumer confidence would dip down to 132 from 134 rating which was registered in August. These results also back up a recent Gallup Poll that has Americans placing economic problems as one of their lowest concerns. This may seem like a good thing but economists are worried about the future. Past trends have shown that high consumer confidence is often followed by a slump.

Fox Business

In a statement, Charlie Bilello, Pension Partners’ director of research, said

When there’s good news in the economy (high consumer confidence), investors are willing to pay a higher multiple for a given level of earnings than when there’s bad news (lower consumer confidence). That’s important when it comes to stocks because higher valuations tend to be associated with below average forward returns.

The opposite is also true. When low consumer confidence is present, it is followed by the market recovering and showing growth for a long period of time. Data shows that investors usually experience double-digit returns for a period of seven years after a drop in consumer confidence.

Rippling Effects

There are already some experts sounding the warning bells of possible doom and gloom. Torsten Sløk who is the chief international economist at Deutsche Bank Securities said the levels of consumer confidence being recorded are synonymous with a coming recession. Other experts point out that the strong US economy may embolden President Donald Trump into taking risks that can backfire on the world economy.

The confidence of the average American consumer is not shared by Wall Street experts though. A recent survey by American Association of Individual Investors shows that a lot of investors are being neutral on the idea of the market being bullish.

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