Behind The Confidence Game

clipped from www.marketwatch.com Of course, the stock market's reaction would certainly appear to be quite rational. Won't more confident consumers spend more money, thereby jumpstarting the economy -- and, in turn, propelling the stock market ever higher? Intuitively appealing as this argument appears, however, it receives little support from the historical data. To find out what the historical record can teach us, I analyzed the Conference Board's consumer confidence index back to 1977, which is when this research firm started updating this index on a monthly basis. I then compared each of the index's monthly readings over this three-decade period with how the stock market performed over the subsequent month, quarter, year, and two-year period. The biggest monthly jumps in the consumer confidence index were, on average, followed by sub-par returns. Conversely, big drops in the index were typically followed by above-average returns. They found that consumer confidence is more of a lagging indicator than a leading one.