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Uncommon Wisdom


Soooo...just how high is today's number anyway?


Something that I try to write about frequently is the danger in accepting commonly held beliefs about what moves markets. Time and again, I have seen bits of "wisdom" passed from trader to trader, but rarely does anyone stop and ask "hey, is this actually TRUE?".

One of my pet peeves is the TV talk regarding economic releases. I've posted a few times about market reactions after jobs reports and other data, and nearly universally the facts show that the data is more contrary than anything. Meaning, when economic news is good, it is often bad (meaning negative returns going forward) for the stock market and vice-versa.

A refreshing bit of research this weekend from a former V.P. at the Philadelphia Fed shows that many studies showing predictive power from two major confidence surveys were flawed, in that they used data that had been revised after the fact. Using real-time data, what we have today to try to predict tomorrow, the surveys in fact really didn't predict anything.

The stock and bond markets often react - sometimes violently - after the University of Michigan's Index of Consumer Sentiment and the Conference Board's Consumer Confidence Index are released. But we should know what these surveys are really worth...they reflect what has happened, and not what will happen.

Don't take my word for it, let's look at the facts. The figures below show the return of the S&P 500 six months after the top and bottom 10% of readings in the Consumer Confidence survey since 1969.

After consumers were most pessimistic:
Average Return: 12.0%
Percentage of time positive: 91%

After consumers were most optimistic:
Average Return: 0.1%
Percentage of time positive: 51%

It is clear that consumers have a horrible record at predicting the stock market. Today's reading of 104 isn't quite "extreme" - it would need to get to 135 or so to be in the top 10% - but remember this data if/when it next does.

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