Each month, we get a flurry of headlines on consumer confidence. It’s up—yay! Things will be good ahead! It’s down—oh no! Look out below! The media reports it as if it means something special. It doesn’t. That’s not to say it isn’t nice when people feel better. But—a repeated theme in this book—feelings are not your friends in investing.
Heck, consumer confidence is so popularly followed, it’s even part of the closely watched Leading Economic Index (LEI). And though a bit wonky, LEI does a pretty good (though not infallible) job of predicting where the economy is going. But confidence is just one of 10 components in that index. (Folks also like to think LEI is predictive of stock returns, but one of the components is the S&P 500. So those who believe LEI is predictive of future stock returns must believe in part that rising stocks are predictive of future rising stocks. But if that were the case, bull markets would never end. Bear markets neither. Can’t be true!)

Confidence Is Coincident

A buddy and I co-authored a scholarly research paper in 2003 on consumer confidence—“Consumer Confidence and Stock Returns”—published in the Fall 2003 Journal of Portfolio Management. If you like geek-speak, you can find the paper online. I’ll summarize: Consumer confidence indexes are coincident to the stock market at best—and slightly lagging at worst. And you know from Bunk 21 that coincident indicators are worse than useless—people think they ...

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