The University of Michigan regularly surveys about 500 consumers which asks them to rate the relative level of current and future economic conditions. In plain English, that means they're essentially asking them how they feel about the economy.
Why does it matter? Simply put, if you feel good about the economy, you're likely to be freer with your spending and if you feel bad about the economy (presently or in the not-so-distant future, then you're likely to spend less. This matters a lot here in America in particular because roughly about 70% of the economy is influenced by consumer spending.
So this "consumer confidence" or "consumer sentiment" survey is important because it acts as a leading indicator for what's most likely to come for the economy.
Generally speaking, when the overall trend in consumer confidence is rising, the outlook for the economy tends to be good because the spending spigot is still turned on. However, there comes a time when the rise in this trend actually becomes a contrarian indicator and really flashes a warning sign for the economy's future. These "bullish readings" become contrarian when they reach roughly the 100 level on the index or higher.
For instance, if you look at the graph below, when consumers were "the most confident" about the future of the economy back around early-2007 (left red circle), we had a massive stock market crash mere months later and a recession too.
Well, here we are once again with several readings that have now breached the 100 level on the consumer confidence index and what's more concerning is now the "trend" in confidence is heading lower. In fact, not only has it broken its green uptrend line, but its reading that came out today gapped far below it and far below expectations (which is the yellow dot above the latest reading).
This is no fluke. In times past, when these confidence readings got this high, it was "the beginning of the end" for that prosperous period. It was a sign of an economic peak and a downtrend in consumer spending which spurred slower corporate earnings, then job layoffs (rising unemployment), which spurs even less consumer spending...and the vicious cycle continues. And as you can see from the chart below, after these peaks, there can be a "crisis of confidence" for quite some time to come.
Another thing that's concerning for the economy is not only the readings of 100 or higher but also when the trend line breaks, the confidence can unravel quite quickly and quite steadily. And I'm writing this to you now because today's consumer confidence reading as broken well below that multi-year uptrend line. That's not a good sign for the economy, corporate earnings and thus your stock portfolio the prices of stocks within them.
But is it likely to turn around and get better anytime soon? There can be spikes higher, even in the downtrend on any one month, however, the University of Michigan also does forecasts on this data and here's where they see it going in the future. So they see consumer confidence/sentiment continuing to erode. So they're confirming that they believe this downtrend in confidence will be the new trend for a good while as well.
In light of all of this, my advice is never to go crawl under a rock and stock up on Spam and food rations. Instead, I admonish you to become empowered and learn how to prepare for what's likely coming for the economy and the stock market.
To prepare your personal finances, I've written a book that will give you a roadmap in to how to be better prepared for the times in which we're like to enter soon. You can find it, here:
And to be better prepared for what's coming in the overall stock market (which can greatly impact 401k's and IRA's), I'd urge you to come join my community of subscribers and get my monthly stock market newsletter (that comes with weekly videos too). It can be found, here:
Please feel free to share this article on your Facebook page and other social media pages. We need to get the word out about what's likely coming so that people are prepared and are better able to handle what's most likely coming down the pike.