Consumer confidence in the U.S. economy is falling fast. This phenomenon will bring key stock indices lower. But sadly, no one is really talking about this. “Buy, buy, and buy even more” is the theme among stock advisors. Optimism is increasing, and so is stock market risk.
The Thomson Reuters/University of Michigan Consumer Sentiment Index, a measure of consumer confidence in the U.S. economy, has fallen to a level not seen since December of 2011. This gauge of consumer confidence fell to 72.0 in November from 73.2 in October. (Source: Reuters, November 8, 2013.)
With that said, please take a look at the chart below of consumer confidence as plotted with the University of Michigan Consumer Sentiment Index in red and the S&P 500 in green. Pay close attention to the circled areas.
Chart courtesy of www.StockCharts.com
Generally, the chart above shows consumer confidence and key stock indices have had a direct relationship since 2001. In fact, at times, consumer confidence acts as a leading indicator of where key stock indices will head.
But since the beginning of this year, this relationship has gone the wrong way! As consumer confidence fell, key stock indices continued to march to new record highs! Just add the divergence between consumer confidence and the key stock indices to my long list of why this stock market shouldn’t be going up.
Consumer confidence predicts where consumer spending will go. If consumers in the U.S. economy are pessimistic about their future, it is very likely they will pull back on their spending. As a result, companies sell less, produce less, and earn lower profits—which eventually results in lower stock prices.
Dear reader, my skepticism towards the key stock indices just grows and grows daily! The higher they go, the harder they will eventually fall.
The fundamentals that drive key stock indices higher are missing. Third-quarter earnings show the continuation of troubling trends—lower company revenues but higher profits. Financial engineering, mostly in the form of stock buyback programs, can only go on for so long. In fact, we are already starting to hear companies provide negative guidance about their fourth-quarter corporate earnings.
My conviction remains the same: key stock indices are running on nothing but freshly printed money provided by the Federal Reserve. This money is setting up the stock market for big disappointment.