Consumer Sentiment Is Low; History Shows That Could Actually Be Good for U.S. Stocks

This past November, the University of Michigan Index of Consumer Sentiment deed 51. That's the second-lowest speechmaking going backmost to the aboriginal 1950s. Instinctively, investors mightiness deliberation that it's a bully clip to get retired of the equity markets erstwhile sentiment is astatine its worst. But does the information carnivore that out? Actually, it doesn't. Here's why.

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Let's commencement by looking astatine 1 information constituent successful the series. The lowest speechmaking for this scale is 50. That occurred successful June 2022. This was the mediate of the carnivore marketplace that was triggered by ultra-high ostentation rates and an assertive Federal Reserve complaint hiking cycle.

That mightiness person seemed similar the perfect clip to get retired of stocks. For a fewer months, it was. The S&P 500 didn't bottommost until October of that year. Over the adjacent 12 months, however, it was a antithetic story. After that grounds debased print, the S&P 500 gained much than 17%.  Granted, that's a illustration size of 1 retired of 60-plus years of data. But the thought down wherefore it happened mightiness beryllium much evident than you think.

Famed capitalist Warren Buffett erstwhile said, "Be fearful erstwhile others are greedy, and greedy erstwhile others are fearful." What he's advocating for with that punctuation is simply a elemental "buy low, merchantability high" strategy. When things look their worst, banal prices are (in theory) discounted. Buffett would accidental that's the clip to buy.

This is simply a bully illustration of that thesis playing retired successful reality. Sentiment was virtually the worst it had ever been. Yet S&P 500 returns implicit the adjacent twelvemonth turned retired to beryllium beauteous good. The adjacent measurement would beryllium to analyse the remainder of the information to spot if the aforesaid trends exist.

To start, I pulled each of the monthly Consumer Sentiment Index readings going backmost arsenic acold arsenic was easy accessible, which was 1985. I besides pulled month-end S&P 500 scale values for the aforesaid period. My explanation of forward-12-month scale returns was to commencement with the opening of the period pursuing the study merchandise date. For example, if the study was for January 1985, I looked astatine S&P 500 returns from Feb. 1, 1985 to Jan. 31, 1986.

I besides grouped monthly study readings into 5-point "buckets." For example, a monthly speechmaking of 76.4 would autumn into the "75-79.9" group. Here are the results of my study.

Data source: University of Michigan. Calculations by author.