Collapsing Consumer Confidence Is a Good Sign for Stocks

A financial divide is growing in America.

This isn't about "haves" versus "have nots"... or rich versus poor. Those separations are a byproduct, not the cause.

The real divide is even more fundamental: It's between the people who own assets... and everyone else.

If you're an asset owner, you've likely prospered in recent years. Real estate prices have held up. And stock prices have soared.

If you don't own assets, you've had a much different experience. Prices for everything have done nothing but rise. Wages have stagnated. And you've probably had a harder time making ends meet.

This divide helps explain why consumer confidence has crashed recently. But as we'll see, that negative outlook is a good sign for asset owners...

Wall Street Doesn't Follow the Crowd's Mood

A rising stock market can solve a lot of economic problems... if you own a share of it.

Unfortunately, not all Americans fall into that group. For folks who don't own assets, life hasn't improved much at all this decade.

That has led to a collapse in how folks feel about the current economy. We can see it in consumer confidence levels.

Specifically, we're looking at data from The Conference Board, a nonprofit business research organization. Each month, it asks regular folks how they feel about the state of the economy. It then uses the results to build its Consumer Confidence Index.

This index has been trending down for years. And it just hit a 12-year low. Take a look...

Consumer confidence rebounded after the worst of the pandemic. But as inflation set in, sentiment about the economy got worse and worse.

Today, with rising energy costs, high electricity prices, and political uncertainty, folks are the most worried they've been since 2014.

That's not a good sign for the state of the country. But if you're an asset-owning American, it's far from a bad omen for your stock portfolio.

To see it, I looked at each instance in which consumer confidence dropped below 82 while the overall stock market was in an uptrend. That has happened just six times since the data begins in 1970. Here's what happened next...

It's true that things look bad for a lot of Americans right now. But remember, The Conference Board's index captures everyone... including that large group that doesn't own stocks. It doesn't mean stock prices are about to fall...

Similar setups have led to gains of 3.6% in three months, 5.9% in six months, and 8.4% over a year. Those aren't large levels of outperformance. But they're enough to tell us that low confidence isn't a sell signal.

Instead, this is more evidence of what we always say: You must keep your feelings out of your investments.

Consumer confidence is low. But the stock market doesn't follow consumer sentiment. And according to history, this kind of fear is no reason to expect the bull market to end.

Good investing,

Brett Eversole