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Sentiment
at 26 Year Low - Time to Celebrate? |
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The
Michigan Sentiment Index hit its lowest reading in nearly three decades
on Friday....so it may be time to celebrate. No, you didn't read
that wrong. When consumers feel their worst, it may actually be
time to be a bold investor.
 We'll
first refer you to an article we posted back in September of last year
- 'Economic
Reality 101'. It was then we put a lot of economic theories to the
test (or at least tested their usefulness) using real results rather
than assumed outcomes. The general conclusion was, most of the highly-touted
economic data was not only unhelpful to investors, but possibly misleading.
Consumer confidence
measures were mostly found to not be helpful...at least when used in
the obvious sense. In other words, strong optimism wasn't inherently
bullish, nor was poor optimism necessarily bearish for stocks. As most
things are, it was all relative.
The irony?
In most cases, when consumers were most confident, investors would have
been wise to sell stocks. When investors were least confident, that was
often the best time for investors to start hunting for bargains. The idea
is called 'contrarianism' - going against the crowd when you're
far outnumbered. The philosophy resurfaced for us on Friday.
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Conference
Board's Consumer Confidence |
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There was and
is a historical basis for the idea of contrarianism. More importantly,
it's rooted in real results, and not just logical assumptions.
 Take
a look at the nearby chart of the Conference Board's Consumer Confidence
historical
readings (not to be confused with the Michigan Sentiment Index, which we'll
look at in a moment).
You know
when confidence was at is lowest point in the last decade? March of
2003 - the beginning of the market's recovery.
You know
when the average consumer was most confident in the last decade?
August of 2000 - the real beginning of the bear market.
In both cases,
the 'qualified opinions' from TV and print journalism were steering investors
in the exact wrong direction at the time.
Why do they
do that? Even though this sentiment data is freely available to anyone
and everyone, it's amazing how most analysts and journalists never actually
take the same look we did. That's not to say we're always right (or even
right this time around); there are always exceptions. More often than not
though, it was darkest before dawn, and vice versa.
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Michigan
Sentiment Index |
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As far as the
Michigan Sentiment Index is concerned, we've observed the same kind of
history - consumers fear the worst just about when the worst is over for
the stock market.
One difference
between the Conference Boards' Consumer Confidence level and the Michigan
Sentiment Index pops out when you take a look at the chart of the latter
...volatility. The Michigan version tends to be a little more erratic than
the other. All the same, it can be useful.
 Indeed,
the Michigan Sentiment Index is at 26 year lows. The media's take was the
expected one, attributing the lull as a cause for - or an exception
to - what happened to stocks on Friday. Here are a few quotes from
the news on the matter...
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"Wall Street ended
its second straight winning week with a moderate advance Friday, overcoming
concerns about consumer confidence and inflation. (Orlando Sentinel)
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"High fuel and
food prices, coupled with "shrinking" income gains and falling home values,
tugs an index tracking U.S. consumer sentiment index to the lowest level
in 26 years." (Market Watch)
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"Consumers' flagging
mood is worrisome for Wall Street because consumer spending accounts for
about 70 percent of U.S. economic activity." (AP)
Every story
on the Michigan Sentiment Index mentioned it was the lowest reading in
26 years. Yet, not one single story went on to say what happened to
the stock market the last time the reading was this low 26 years ago.
We will though.
In October of
1990, when the Michigan Sentiment Index scored 63.0, the S&P 500 closed
the month out at 304.0. Six months later, at was trading at 375...a
23% gain. Twelve months later, it was at 392...a 29% gain.
We saw similar
gains take shape after the 1982 dip in sentiment, and the 2003 lull in
sentiment. And yes, we saw readings were the highest for the Michigan
Sentiment Index when tops were being made for stocks.
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Bottom
Line |
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There are two
key points we're making here.
First, THIS
IS NOT A LASER-PRECISE SURGICAL INSTRUMENT! We're not saying the market's
bottom was absolutely made on April 25th, 2008. Maybe it was and maybe
it wasn't - nobody can really know. This is bigger-picture stuff. We're
just saying it's these extreme cases that usually occur sometime around
the bottom.
In other words,
in terms of timing, we think we're closer to the end of the lull than the
beginning.
Second,
an extremely low reading in one month doesn't mean the index can't move
even lower in the next month. What we're looking for is the trough, which
is only defined once a rebound has started. And, we can't just look at
the Michigan Sentiment Reading either ...other signals of capitulation
have to be made as well.
On the other
hand, the chart speaks for itself. If you're playing the odds, you have
to decide if this time around is the norm, or the exception to the norm.
We'll look at
the antithesis of this signal later in the coming week. Unemployment
is still trending higher, at least according to the most recent
readings. That's historically not good for investors, so we'll try and
rectify the opposing ideas when we look at that chart. For today, we just
wanted to get your strategic wheels spinning.
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Updated: 3:10 pm PST (23:10 GMT), November 20, 2008
