Financial markets often present perplexing situations, and the current divergence between consumer confidence and sentiment is a prime example. The Conference Board’s Consumer Confidence Index (CCI) and the University of Michigan’s Index of Consumer Sentiment (UMICS) typically maintain a relatively small gap. However, a notable chasm has emerged in recent months, reaching an unprecedented level at the close of 2022 and remaining historically high.
The stock market’s ascent to new peaks amidst widespread consumer apprehension may appear contradictory. Yet, a retrospective examination reveals a recurring pattern: substantial disparities between the CCI and UMICS often precede periods of market turbulence. This phenomenon is evident in the stark difference in average market performance following months with the widest and narrowest CCI-UMICS spreads.
A potential explanation for this correlation lies in the distinct focus of each index. Some financial professionals argue that the UMICS, with its emphasis on personal financial situations, serves as a more accurate predictor of future consumer spending. Conversely, the CCI, which emphasizes labor market indicators, may be more reflective of economic conditions that have already materialized.
This distinction between leading and lagging indicators helps clarify why the CCI-UMICS spread tends to expand before bear markets. At the peak of bull markets, lagging indicators often portray a favorable outlook, while leading indicators signal potential trouble ahead. The 2023 bear market, however, deviated somewhat from this pattern, with a less pronounced narrowing of the spread. This has led some market observers to speculate that the 2023 downturn may only be the initial phase of a protracted period of market instability.
Historically, bear market bottoms have coincided with a significantly narrower or even negative CCI-UMICS spread. Should the current spread eventually contract to align with this historical average, the ensuing bear market could be particularly severe.
Key Points:
- Market Disconnect: The current disparity between consumer confidence and sentiment is historically significant.
- Historical Precedent: Large CCI-UMICS spreads often foreshadow market downturns.
- Leading vs. Lagging Indicators: The distinct focus of each index may explain their predictive power.
- 2023 Anomaly: The 2023 bear market deviated somewhat from historical patterns, raising concerns about future market stability.
- Potential Implications: If historical trends hold, a further narrowing of the spread could portend a severe bear market.
