Consumer confidence and stock returns

Kenneth L. Fisher Chairman, CEO & Founder Fisher Investments, Inc.13100 Skyline BoulevardWoodside, CA 94062-4547650.851.3334andMeir StatmanGlenn Klimek Professor Santa Clara UniversityDepartment of FinanceLeavey School of BusinessSanta Clara, CA 95053-0388408.554.4147mstatman@scu.edu August 2002We thank Curtis Christian, Ramie Fernandez, Richard Oberuc, Carrie Pan,Richard Rippe, Jonathan Scheid and Andrew Teufel. Meir Statmanacknowledges financial support from The Dean Witter Foundation.

Consumer confidence and stock returnsAbstract

Financial advisors who worked to restrain exuberant investors in the late 1990s,worked equally hard to lift desperate investors in the early 2000s. Will lower stock prices sapthe confidence of consumers? Will lower consumer confidence extinguish all hope for investors?We study the consumer confidence measures of the Conference Board and theUniversity of Michigan and the investor sentiment measures of the American Association of Individual Investors and Investor’s Intelligence. We find that consumers grow confidentwhen investors grow bullish. Consumer confidence declines when stock prices decline butinvestors need not fear that declines in consumer confidence would be followed by low stocksreturns. Low consumer confidence is followed by high stock returns more often than it isfollowed by low stock returns.

Consumer Confidence and Stock Returns

The work of financial advisors is never done. In the late 1990s financial advisorsworked hard to restrain the exuberance of investors and now, in the early 2000s, they work equally hard to lift their desperation. How can investors not despair when falling stock pricesseem to follow falling consumer confidence in an endless downward spiral?Financial advisors strive to replace exuberance and despair with facts. But what arethe facts? Do falling stock prices erode consumer confidence? Does lower consumer confidence bring lower stock prices? We answer these questions and several more. We findthat consumer confidence falls when stock prices fall but investors need not fear an endlessdownward spiral. In fact, stock prices are more likely to rise than to fall following lowconsumer confidence.Investors were a frightened group in July 2002. The S&P 500 Index, which peaked at1,527 in March 2000, was down to 848 by July 19, 2002 and the Nasdaq, which peaked at5,049, was down to 1,319. “Stocks’ slide is playing havoc with older American’s dreams,”was the heading of Zernike’s (2002) article. It told the story of Jacobo Black, a 67 year-oldretired real estate agent in Miami, who had canceled plans for a trans-Atlantic cruise this year.“He could have used the distraction from thinking about the market,” wrote Zernike. “I feel sovulnerable,” said Mr. Black. “Here I was with thousands of dollars in savings and here I amlosing it like water running through my fingers.” (p. A16).Jacobo Black was only one of many frightened investors and consumers. “Consumer confidence has fallen the most since terrorists attacked New York and Washington…” saidThe New York Times (2002). “The University of Michigan said its preliminary index of consumer sentiment for July sank to 86.5, an eight-month low, from 92.4 in June.”