I put this graphic together when the new consumer confidence sentiment number was released today.
How to read it.
· Yellow line reads 70 – that is a pessimistic level
· Red line is at 90 – that is an optimistic level
· The graph goes back to 1979 and shows the monthly sentiment number
What does it tell us?
· The red lines show two relatively stable periods of 90+ consumer sentiment readings and whalah 16% and 14% annualized returns for multiple years.
· The tan captions point out periods that had “significant and rapid drops in sentiment.” The 3rd tan caption shows where we are at today, will history repeat and give us a strong rally? I don’t know.
· What may not be as obvious is investor behavior. The two red lines demonstrate extended periods of 90 or above readings on consumer sentiment. I call this the “good times trend” and it is consistent with my hypothesis, that investors are good at following trends, but not so good at picking directional changes.
Wisdom speaks, the old saying may be relevant “Be fearful when others are greedy and greedy when others are fearful” – The S&P 500 one year performance following the first two significant drops in sentiment are respectable 25% and 33%. The first two examples were times that investors were hitting the panic sell button, because of extreme pessimism on the economic situation, yet, it was actually a great entry points into stocks.
· The recent rally, in my opinion, came too early. History will tell if I’m right or a baboon.