I’ve written before (many times) about the fact that strong consumer confidence is not at all good for the markets. You must have heard the news:
“The Consumer Confidence Index increased in November and is now at its highest level in more than four and a half years (76.4 Feb. 2008),” writes the Conference Board’s Lynn Franco.”
Although I remain bullish earnings into the New Year and expect that over 6 to 9 months stock markets will prove resilient, I remain concerned that the market might be vulnerable in the near term. You can read previous commentaries where I explain why in more detail, but it might have more impact to show you again in a picture.
As you can see well enough, peaks in consumer confidence occur just before markets correct on the downside. It sort of makes sense when you think about it. When pessimism is rampant, stocks are cheap. Valuations then begin to rise because there are reasons to support increasing optimism (stronger economic data, surprisingly good earnings reports). At some point, there’s just too much optimism and any event (a bump in interest rates, poor employment data) that causes investors to second guess their bliss results in adjustments in expectations and valuations.
Beware a confident consumer, but don’t hesitate to put some cash to work in the stock market if we get a sell-off.
