Consumer Confidence and Investor Sentiment – Too High?

The latest Consumer Confidence report was released on August 28 and the index is reaching levels not seen since 2000. The index is broken down in to three parts—the present situation, expectations, and the total. The total reading jumped to 133.4 in August and that is the highest reading since October ’00. The present situation portion of the index jumped to 172.2.

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I have written several articles about consumer confidence this year, but one in particular that I was thinking about this morning was one from May 8. In that article I pointed out how the high readings didn’t seem to matter as much as the direction the index was moving did.

In the past the index has been able to remain above certain levels without a correction in the market or a recession causing the index to drop. From April ’99 through January ’01, the index remained above the 130 level. It even held above the 140 level from February through April of 2000. But there does come a point when the index reaches a level that becomes a concern.

The only readings the Consumer Confidence index had above 140 all came in 2000. The all time high reading is 144.7 in March ’00. Seeing the current reading (133.4) so close to the all time high reading, makes me nervous.

In the article back in May, I showed a chart of consumer confidence along with the S&P 500. I updated the chart with the figures through the August reading for confidence and used the closing price from August 30 for the S&P. As you can see the two tend to trend together.

In the previous article I pointed out that the index can remain elevated for some time and that it is when the index falls by more than 10% that you need to take action. I maintain that theory, but I also believe that having too much of your portfolio allocated to stocks at this time would be risky.

One of the reasons I feel the market is at risk of another correction is the most recent Investors Intelligence report. The report that measures the sentiment of financial advisors and this past week’s reading showed 59.6% of advisors are bullish and that is the highest reading since January—right before the sharp drop. I also wrote about the sentiment being too high in January.

At that time, the ratio of bullish advisors to bearish advisors was at 4.77 and that was the highest reading since 1987. The current ratio is only 3.26, but that is still higher than the historical average and it has been rising in recent months. The bearish percentage is at 18.3% and it has been holding steady in that area for the last three weeks.

Yet another concern I have is President Trump’s fixation on the market. Specifically a recent tweet raised a red flag for me. On Thursday, August 30, the President posted the following tweet:

“The news from the Financial Markets is even better than anticipated. For all of you that have made a fortune in the markets, or seen your 401k’s rise beyond your wildest expectations, more good news is coming!”

While I applaud the President’s enthusiasm, it is concerning when he makes statements like “more good news is coming.”

The momentum for the market is still to the upside, but the consumer confidence levels and the investor sentiment are at levels that concern me. I have always looked at stock allocations with a sliding scale—partly based on an investors age and their risk tolerance with the other part based on market conditions and sentiment. Based on current market conditions and extreme optimism, I would suggest lowering your stock allocation.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.