If you watch CNBC or read The Wall Street Journal you’ve no doubt heard or read about the University of Michigan Index of Consumer Sentiment (ICS). There’s been a lot of chatter recently about the ICS because it is at historically low levels, indicating growing pessimism on the part of consumers. The Federal Reserve uses the survey as one of many data points in its efforts to keep the economy on an even keel. Interestingly, there is a similar consumer survey produced by the Conference Board, which hasn’t been nearly as pessimistic in recent months.
In this post we will explore what predictive qualities (if any) the ICS has had historically, what the ICS is, and what investment themes or strategies one might glean from the data.
The ICS is comprised of roughly 40 questions and is given to about 800 respondents each month. A sample questionnaire is linked below. The survey asks the respondent questions about their personal economic and financial circumstance and outlook for the future.
The ICS’s predictive value, both in terms of the economy and the stock market, is a mixed bag. Since 1970 the ICS has trended below the mean about 52% of the time prior to an actual recession (defined as two consecutive quarters of negative GDP growth). About as often as not the economy is already in recession by the time the ICS has gone negative, so we see no real predictive / prospective takeaways that are actionable.
Interestingly, the ICS is a better contrarian indicator for the stock market. As the chart from JP Morgan illustrates, stock market returns for the last eight ICS troughs have averaged about 25% over the succeeding 12 months. The difficulty is in calling the bottom. We know the danger of confusing causation and correlation. While we don’t view this data as actionable, we do take comfort in the fact that equity valuations are cheaper now, and that consumer confidence seems to be a lagging indicator of future stock market returns.
While it’s impossible to consistently call a stock market bottom, we view the ICS data (along with other data we follow) as a favorable indicator for equity returns over the next 12-18 months.
Click here for a copy of the ICS survey: ICS survey.pdf