Good news! American consumers are feeling about as bullish as they have been in nearly 20 years, thanks in large part to a healthy job market.
The Conference Board reported Tuesday that its index of consumer confidence is near 18-year highs. This follows a similar report from the University of Michigan earlier this month, which showed that consumer sentiment was at its best level since 2004.
But here’s some potentially bad news — for investors at least. Consumers are notorious for being overly optimistic at the top of the market cycle.
So the high levels of confidence on Main Street may once again signal tough times ahead for Wall Street. That trend may already be under way now as stocks pull back because of trade war concerns.
Maximum optimism = maximum prices?
“From an economic perspective, elevated confidence is a sign of strength,” said William Delwiche, investment strategist with Baird. “But from the perspective of the stock market, maximum optimism tends to coincide with maximum prices.”
Delwiche noted consumer sentiment levels often track the stock market and the two readings reported in the past few weeks were for April — i.e. before this month’s market turmoil due to increased trade tension.
Along those lines, the recent slide in stocks and long-term bond yields may be a more important indicator of sentiment than last month’s consumer confidence measures. The US 10-Year yield recently hit its lowest level since September 2017.
That may not be enough to set off recession or bear market alarm bells just yet. But it could be a sign that earnings and economic growth may have peaked for the foreseeable future.
“While we are not projecting a downturn yet, the message from the financial markets is clearly one of a slowing economy,” said Joseph LaVorgna, chief economist for the Americas at Natixis, in a report Tuesday.
But if the job market remains healthy, Delwiche believes consumer spending should continue to grow steadily. And that would lessen the need for the Federal Reserve to lower interest rates as Trump and others in his administration have called for.
Much like the stock market, just because something is at a historically high level doesn’t mean that it can’t keep climbing before it eventually tops out. So the American consumer could remain bullish for several more months — or even years.
“We’ve been citing peak consumer confidence as a contrarian indicator for two years,” said Shannon Saccocia, chief investment officer at Boston Private.
Last few times confidence was this high, bad things came next
But it may be only a matter of when, not if, high consumer confidence is eventually followed by a downturn.
“One of the biggest things I hear from investors right now is that things look great … so why worry about the risk of recession?” said Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co.
“But if it’s always ‘darkest before the dawn,’ maybe someone should coin the phrase ‘it’s brightest before you’re hit by that oncoming truck,'” he added.
Kleintop noted that every time consumers have been as ebullient as they are right now during the past few decades, there eventually was a day of reckoning not too long afterward.
“Over the past 30 years, the current [consumer confidence] level has only been exceeded in 2007, 1998-2001, 1994 and 1990 — periods that immediately preceded difficult times for consumers and investors,” he said.