The Reuters/University of Michigan consumer sentiment preliminary index for February that was reported last week declined slightly from the late January number and it was lower than expected as consumers continued to fret over unemployment. The index is now down 24% from January 2007, according to data from the St. Louis Federal Reserve.
Ironically, when consumers are glum, that could be good news for the financial markets.
A 2002 study by Meir Statman and Kenneth Fisher found that, “Low consumer confidence is followed by high stock returns more often than it is followed by low stock returns.”
That seems a little counterintuitive because you would expect apprehensive consumers to be in no mood to buy financial securities and push their prices higher. On the contrary, though, the authors said, “When people lose confidence as consumers, they should regain it as investors.”
So, how does this make sense?
Not surprisingly, declining financial markets tend to drag down consumer confidence. However, at some point, financial markets typically revert to the mean and start heading up again. Often, financial markets start heading up before consumer confidence does.
Does this mean you should base your entire investment strategy on the level of the consumer sentiment index?
Of course not! This is just another example of why your best strategy is to have a plan in place and ignore the market “noise.”
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