How to Feel About Consumer Feelings
Does your neighbour know where the economy is headed in the next 12 months? Since at least the 1970s, various universities and researchers have been measuring consumer sentiment by asking ordinary people questions like: “Are you better off or worse off financially than you were a year ago?” or “Do you think that a year from now you will be better off financially, worse off financially, or just about the same as now?”1 The results of these surveys can sometimes be viewed as a beacon of how investors feel about the direction of the economy.
Many surveys are showing consumer sentiment as pessimistic relative to the long-run average.2 Investors interpreting this as an ominous sign for markets may not have anything to fear though. Looking specifically at the Consumer Sentiment Index published by the University of Michigan against subsequent 12-month stock market returns shows no discernible pattern, except that stocks tend to go up more often than they go down. Out of the 226 months where the sentiment index was below the long-run average, the average equity premium over the next year was 10.6%.
If your neighbour is feeling down about the economy, that doesn’t necessarily mean you should change your outlook or your investment portfolio. Markets tend to price in the latest views on the economy, including consumer optimism.
Next 12-Month US Equity Premium Against University of Michigan Consumer Sentiment Index
December 1978–December 2023
Past performance is not a guarantee of future results.
This article originally appeared in Short N Sweet, a newsletter for Dimensional clients.
index descriptions
Fama/French Total US Market Research Index: July 1926–present: Fama/French Total US Market Research Factor + One-Month US Treasury Bills. Source: Ken French website.
Results shown during periods prior to each index’s index inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.
Footnotes
- 1. The questions included come from “Surveys of Consumers”, The University of Michigan. Copyright © 2024, The Regents of the University of Michigan. All Rights Reserved. Similar questions are asked by other similar surveys, for example the ANZ-Roy Morgan Consumer Confidence survey and the Westpac-Melbourne Institute Consumer Sentiment survey.
- 2. The three consumer confidence indexes noted above in footnote 1, all have index levels below the long-term average as of 30 September 2024.
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