Wall Street is deluding itself that this week’s U.S. consumer confidence reading is great news. It actually is flashing warning signals.
You have to look hard to detect those signals, since on the surface the latest news seems to be exceedingly good. Economists polled by the Wall Street Journal had on average predicted that the Conference Board’s Consumer Confidence Index (CCI) for July would be 112.0. It in fact came in at a surprisingly strong 117.0.
As I’ve written before, the index by itself is a poor leading indicator of the stock market. One way to transform the CCI into something with a creditable track record is to focus on the difference between it and the University of Michigan’s Consumer Sentiment Index (UMI). It’s a worrisome sign when the CCI is much higher than the UMI.
Read: That stock market rally you’d expect from soaring consumer sentiment? It’s already happened.
Now is one of those times. The spread between the two has actually widened over the last several months. The CCI has increased by 13.3 points since April’s reading, for example, while the UMI has increased 9.1 points. The spread therefore has grown 4.2 points; it now stands at the 98th percentile of the distribution since 1979, which is the first year for which monthly data for both indices began.
The chart above plots monthly readings of the CCI-versus-UMI spread over the past 4+ decades, along with for each month the S&P 500’s
SPX,
subsequent 12-month return. Though the indicator isn’t perfect, you will notice that high spread-levels more often than not were followed by below-average S&P 500 returns. The correlation between the two data series in the chart is significant at the 95% confidence level that statisticians often use when assessing whether a pattern is genuine.
‘Wall Street-Main Street disconnect’
The reason the current spread is so wide is that the CCI measures different aspects of consumer sentiment than the UMI. According to James Stack of InvesTech Research, from whom I first heard about this indicator, the CCI more heavily reflects consumers’ attitudes towards the overall economy, while the UMI is more heavily weighted towards their immediate personal circumstances.
Right now, for example, consumers are being fed a constant diet of upbeat news about the overall economy: inflation is coming down, and an economic “soft landing” is becoming increasingly probable, we’re told. And yet the typical consumer is still struggling on a personal level.
Read: No chance we’re having a soft landing’: Stock-market strategist David Rosenberg gives Powell’s Fed no credit — and no mercy
No wonder there is such a spread between the two indices. This widening spread is related to what I call the “Wall Street-Main Street disconnect”: Wall Street is celebrating while the economy in Anytown, USA is struggling. The Nasdaq Composite Index is nearly 40% higher than where it stood at its October low. The S&P 500 is less than 5% away from an all-time high, for example.
In contrast, median pay has risen less than 1%, in inflation-adjusted terms, over the last 9 months.
A wide Wall Street-Main Street disconnect is not healthy, from any of a number of perspectives. Past disconnects this wide often presaged periods in which the stock market suffered.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]
Also read: ‘It’s a great, great time for bulls’: Soft-landing views solidify in U.S. stock market
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