In a recent research note Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, highlights the negative sentiment that is persisting in the economy. She cites a little known fact showing that negative consumer sentiment is actually very good for equities:
“Weak consumer confidence good for stocks … huh?
I want to transition back to the macro landscape now. Let’s take a look at what has been one of the stickiest of weak indicators—consumer confidence.
As you can see in the chart below, the Conference Board’s measure of Consumer Confidence hit an all-time low in March of 2009. It has since risen, but the latest dip puts it back in extreme pessimism territory—a territory in which it’s resided less than 15% of the time.”
This is a contrarian thought, but the proof is in the pudding. When consumer confidence is over 110 equities have returned -0.2% per year. When consumer confidence is between 66 and 110 equities have returned 6.4% per year. And when consumer confidence is below 66 equities have averaged an annual return of 14.9%. Like my Wall of Worry, this gives some credence to the idea that stocks climb a wall of worry….
Source: Charles Schwab
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.