MarketWatch’s Hulbert: Consumer Confidence Index Works as Contrarian Indicator for Stocks

Friday, 30 Nov 2012 08:15 AM

By Dan Weil

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Consumer confidence indices provide a better measure of where stocks have been rather than where they’re going, says MarketWatch columnist Mark Hulbert.

It’s no wonder, then, that stocks fell Tuesday, the same day the Conference Board reported that its consumer confidence index rose to the highest level this month in more than 4 ½ years.

“The market tends to do better following big drops in consumer confidence than after particularly big jumps,” Hulbert writes.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

He compared the Conference Board index over the last 30 years with the stock market’s performance in the following months.

“[T]he biggest monthly jumps in the Consumer Confidence Index were, on average, followed by sub-par returns,” Hulbert writes. “Conversely, big drops in the Index were typically followed by above-average returns.”

The “most robust statistical pattern” he found was that the Consumer Confidence Index rises after periods of stock market strength. That would explain November’s 4 ½-year high for the index.

While that rise in confidence may not help stocks, some experts say it can help the economy.

“Confidence is holding up well,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, tells Bloomberg. “Spending is going to continue to increase. This bodes well for the fourth quarter.”

In particular, “households seem to be upbeat” and consumers “should be willing to spend money on Christmas,” economist Ray Stone of Stone & McCarthy Research Associates tells Reuters.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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