Why Investors Should Be Wary of Consumer Confidence Numbers

by Dan Wiener | December 5, 2011 9:52 am

I’ve often talked about consumer confidence numbers and how they are poor indicators of anything other than how consumers say they feel at the moment — though they get lots of ink when they are released. I thought I’d expound on that for a moment.

Last Tuesday, the Conference Board released its consumer confidence numbers for November, and there was a wicked jump — up almost 37% compared to October. Investors liked Tuesday’s number, and stocks rose. Of course, Wall Street might have forgotten that in August that same number dropped 24%. Do numbers that move that much in one month really mean anything?

Consumer confidence indicators, whether coming from the Conference Board or the University of Michigan, are not good at predicting how consumers will act. And they don’t always agree with one another either. Looking at 36-month correlations over almost three decades, the range of correlations runs from 100% at times to -8%. Over one-year periods, it’s even worse, with a correlation that has run as low as -37%. Heck, during the past three months alone, the Conference Board’s number has gone up 3%, down 12% then up 37%, while the University of Michigan’s number has risen 7%, 3% and 5%.

Like I said, these are weird numbers and hard to live by, much less to invest by.

We can, of course, take some comfort in the fact that six central banks have gotten together to agree to lend money to euro banks in an effort to stem the tide of recession in Europe. It’s a good first step, but a baby step at best. Of course, investors saw it as a massive plus and bid up stocks big-time Wednesday (Thursday, not so much).

Europe is heading into a recession, but how deep it will go remains to be seen. Money supply is drying up and lending is getting tougher (shades of our own situation here in 2008). A mild recession is something we all will be able to live with, but a deep one will scar markets worldwide.

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