Consumer Sentiment is a Poor Guide for Investing. Look to Your Values Instead.
Should consumers care about consumer sentiment?
Consumer sentiment refers to the overall attitude and confidence that consumers have about the economy and their personal financial situation.
When consumer sentiment is high, it typically means that consumers are feeling confident and optimistic about the economy, and are more likely to spend money and invest in the stock market. This can result in higher stock prices and a generally bullish market.
On the other hand, when consumer sentiment is low, it may indicate that consumers are feeling uncertain or pessimistic about the economy, and are less likely to spend money or invest in the stock market. This can lead to lower stock prices and a bearish market.
Some financial wisdom suggests that it is important to be aware of consumer sentiment because it can help you make more informed investment decisions. By monitoring the index, you can get a sense of how consumers are feeling about the economy and adjust your investments accordingly. For example, if consumer sentiment is high, you may consider investing in companies that are likely to benefit from increased consumer spending.
But can we really rely on this index to help us make investment decisions? Sure, it gives us a sense of how consumers are feeling about the economy, but how “right” has this index been in the past?
How Predictive Has the Consumer Sentiment Index Been in the Past?
Let’s take a look at the JP Morgan chart below which shows the consumer sentiment index from 1971 to 2023 and subsequent 12-month S&P 500 returns.
Figure 1. Consumer sentiment is a poor guide for investing.
Source: JP Morgan
Notice that, on average, 12 months after peak positive sentiment (when people feel confident about the economy and investment markets), the S&P 500 on average returned 4.1%. This is certainly better than a negative return, but 12 months after consumer sentiment lows, the S&P 500 on average returned almost 25%!!
Quite the opposite of what you might expect, isn’t it? So, what’s the deal with this index and how can it be used?
How to View Consumer Sentiment
Consumer sentiment indicators can be a useful tool for investors to gain insights into potential stock market returns, but their accuracy is not always guaranteed.
While consumer sentiment can provide valuable information about consumer behavior and spending habits, it is only one of many factors that can influence stock market returns. Other factors such as economic indicators, company earnings reports, geopolitical events, and interest rates can also have a significant impact on the stock market.
Additionally, consumer sentiment indicators can sometimes be subject to biases and inaccuracies. For example, survey respondents may not always provide accurate or representative responses, or the survey methodology may not capture all relevant factors.
Despite these limitations, consumer sentiment indicators can still be a useful tool for investors when used in conjunction with other analysis and indicators. By looking at consumer sentiment trends over time and comparing them to other economic indicators, investors can gain a more complete picture of the market and make more informed investment decisions.
Bad Times Make for Good Buys
Recently, in June 2022, consumer sentiment hit a record low of 50 and has inching been inching back higher ever since. Given the data we’ve just gone over and how to use the index as an investor, we must ask: is it possible that bad times make for good buys?
That’s certainly what Warren Buffett meant when he said, “Buy when there’s blood in the streets, even if the blood is your own.” Bear markets give you the opportunity to buy shares at deep discounts. At first it may feel like swimming against the crowd (something our brains almost always explicitly try to warn us against), but given what we have just seen in the charts above, this may be a good thing.
But that’s not the only takeaway. The second one, and one that might help you right here and right now, is this: sometimes when it feels the worst, it is just about to get better. And of course, there are ways to take advantage of that. Like Buffett, we see opportunities in downturns (like letting the market bring the deals to us and buying assets at a discount) that will later pay off. Selling off stocks for fear of loss is counterproductive to building wealth. Instead, we look for openings to increase our potential returns over time.
Bad Times (Also) Make for Flexing Good Decision-Making Muscles
When you do a little digging into what actually contributes to higher returns, you’ll find that there are a handful of factors that make the difference including investment costs, asset allocation, asset location, withdrawal order, rebalancing, and…behavior?
Yes, that’s right. Your decisions are one of the top factors influencing your investment returns. The greatest portfolio in the world stands no chance against consumer behavior, which is why decision-making in a down market is critical to understand.
The definition of the word “decision” actually has Latin roots and the meaning of the word “decide” comes from the Latin word, decidere, which is a combination of two words:
de = ‘OFF’ +
caedere = ‘CUT’
CUT + OFF = DECISION!
To make a decision literally means (Latin definition) to cut off other options or choices. We choose one path at the exclusion of others. Some decisions are hard to make, while others are easy.
So how do we go about making decisions when it comes to things as important as investing?
Certainly, we don’t flip a coin or gamble with our future. Likewise, we shouldn’t make major money decisions because of fear of loss (or wavering consumer sentiment).
We should make major decisions based on our values—that is, what is important to us and makes us who we are. If you have a spouse, you can explore those values together to make decisions about your money. Alone or together, you should have a list of your top 5 values. They may include your health, wealth creation, relationships, personal development, integrity, giving back, and much more.
Whether you realize it or not, your highest personal values drive all your behavior which generates all your life results.
And when it comes down to it, almost every decision in life is a financial decision. When your values are clear, what to do with your money becomes easy.
Ted Halpern
President and Founder