Private consumption accounts for nearly 70% of US nominal GDP. Therefore, consumer sentiment should have some correlation with market performance.
Financial journalists are behaving as if this is indeed the case. Consumers and non-consumers alike, every time a new sentiment or confidence figure is released, experts take immediate action to see how the data impacts markets and the economy as a whole. I guess. But how much do these measures actually affect market performance?
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To answer this question, we explored the correlation between consumer and business sentiment indicators and market returns. Specifically, we looked at the following monthly data: University of Michigan Consumer Confidence Indexon the conference board US Consumer Confidence Index (CCI), and Business Confidence Index (BCI) and US High Yield Bonds, US Long Bonds, US Short Term Bonds, US Gross Bonds, US Growth Stocks, US Value Stocks, US Small Caps, US Large Caps, and International Equities.
Taken together, we found no significant or sustained correlations between market returns and the three sentiment indicators over the 50+ year sample period. The highest correlation between the University of Michigan Consumer Sentiment Survey and US small caps peaked at a weak value of 0.21.
Correlation between Changes in Consumer Confidence Index and Investment Returns from 1970s to 2020s
Michigan Consumer emotional quotient |
consumer confidence Index (CCI) |
business confidence Index (BCI) |
|
US high yield bonds | 0.18 | 0.17 | –0.01 |
long-term US bonds | –0.01 | 0.04 | –0.10 |
US short-term bonds | –0.01 | 0.03 | –0.11 |
US bonds | –0.01 | 0.08 | –0.13 |
US growth | 0.14 | 0.12 | 0.07 |
US value | 0.17 | 0.15 | 0.07 |
US small cap | 0.21 | 0.14 | 0.11 |
us large cap | 0.15 | 0.15 | 0.06 |
International | 0.15 | 0.18 | 0.12 |
However, over time, the correlation shows some clear trends.
The correlation between the University of Michigan Consumer Confidence Index and stock returns has declined. In fact, since 2010, it has declined sharply and is statistically indistinguishable from zero.
University of Michigan Consumer Sentiment Index: Historical Market Correlation
1970s | 1980s | 1990s | 2000s | 2010s | 2020s | |
US high yield bonds | 0.24 | –0.05 | 0.34 | 0.35 | –0.09 | 0.20 |
long-term US bonds | 0.24 | –0.19 | 0.01 | 0.17 | –0.13 | –0.07 |
US short-term bonds | 0.23 | –0.09 | –0.09 | 0.05 | –0.16 | 0.14 |
US bonds | 0.22 | –0.15 | –0.01 | 0.13 | –0.18 | 0.09 |
US growth | 0.09 | 0.29 | 0.12 | 0.24 | –0.04 | –0.05 |
US value | 0.13 | 0.27 | 0.11 | 0.31 | –0.07 | 0.01 |
US small cap | 0.08 | 0.33 | 0.18 | 0.36 | 0.00 | 0.04 |
International | 0.08 | 0.31 | 0.10 | 0.28 | –0.12 | 0.06 |
us large cap | 0.11 | 0.25 | 0.13 | 0.28 | –0.03 | –0.02 |
International | 0.08 | 0.31 | 0.10 | 0.28 | -0.12 | 0.06 |
However, the CCI has the largest positive correlation to stock returns since the 2000s. And since 2020, equity correlations and bond correlations have averaged 0.30, which is quite large.
Consumer Confidence Index (CCI): Historical Market Correlation
1970s | 1980s | 1990s | 2000s | 2010s | 2020s | |
US high yield bonds | 0.25 | 0.014 | 0.16 | 0.15 | 0.20 | 0.35 |
long-term US bonds | 0.09 | 0.01 | –0.04 | –0.02 | –0.09 | 0.26 |
US short-term bonds | 0.04 | –0.04 | –0.09 | –0.09 | 0.10 | 0.34 |
US bonds | 0.16 | 0.03 | –0.07 | –0.04 | 0.05 | 0.36 |
US growth | 0.00 | 0.01 | 0.03 | 0.25 | 0.18 | 0.22 |
US value | 0.04 | –0.01 | 0.04 | 0.30 | 0.19 | 0.27 |
US small cap | 0.08 | 0.01 | 0.06 | 0.22 | 0.17 | 0.32 |
us large cap | –0.02 | 0.01 | 0.04 | 0.29 | 0.18 | 0.24 |
International | 0.03 | 0.01 | 0.10 | 0.28 | 0.22 | 0.41 |
BCI shows a similar trend. The BCI has the highest positive correlation with equity returns, starting an upward trend in the 2010s.
Business Confidence Index (BCI): Historical Market Correlation
1970s | 1980s | 1990s | 2000s | 2010s | 2020s | |
US high yield bonds | –0.29 | –0.15 | 0.03 | 0.13 | 0.19 | 0.22 |
long-term US bonds | –0.35 | –0.21 | –0.11 | 0.05 | –0.06 | 0.09 |
US short-term bonds | –0.12 | –0.17 | –0.22 | 0.04 | 0.06 | 0.06 |
US bonds | –0.39 | –0.18 | –0.16 | 0.08 | 0.06 | 0.14 |
US growth | 0.14 | –0.04 | 0.07 | 0.09 | 0.20 | 0.11 |
US value | 0.05 | –0.09 | 0.05 | 0.10 | 0.23 | 0.23 |
US small cap | 0.13 | –0.02 | 0.10 | 0.15 | 0.23 | 0.23 |
us large cap | 0.06 | –0.09 | 0.07 | 0.09 | 0.21 | 0.17 |
International | 0.11 | 0.01 | 0.15 | 0.16 | 0.17 | 0.28 |
There are several potential ramifications for the market to correlate more with the CCI and BCI than with the University of Michigan Consumer Confidence Index. Perhaps the CCI and BCI have risen in prestige over time compared to the Michigan index and are now gaining more market attention. Or maybe their methodologies are more reflective of evolving markets and economies.
Of course, whatever the cause of these phenomena, given the relative weakness of these correlations, the bigger point is that financial journalists and pundits may derive more than justified meaning from these indicators. It means that there is sexuality.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect those of the CFA Institute or the author’s employer.
Image credit: ©Getty Images / Natee Meepian
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