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Importance of the Consumer Confidence and Sentiment Surveys

With the mid-term elections just one year away, the press and media raised various topics, including economic, political, healthcare, social, etc. If one is concerned about mid-term elections next year, the focus should be on consumer confidence and sentiment surveys.

Two surveys investors focus on every month are the Consumer Confidence and the Michigan Consumer Sentiment Indexes. Both indexes track the behavior and mood of American consumers. Since over two-thirds of the American economy (US GDP) is consumer spending, the two sentiment indicators can offer insights into the degree of optimism of American consumers.

Since each of the sentiment surveys aims to evaluate the confidence level of American consumers, they can be a good indicator of future spending habits, savings, and consumption. The surveys offer insights into the degree of confidence Americans feel about their financial status. In other words, are their finances the same, better, or worse in the future? During a Presidential Election Year, the sentiment numbers can play a pivotal role in helping to decide the next President. During a mid-term election year, these numbers can change the balance of Congress.

Consumer Confidence Index (CCI) is a monthly report released on the last Tuesday of each month. The survey is published by the Conference Board, a not-for-profit research organization for business. A sample of 3,000 households is surveyed across the U.S each month. The survey focuses on five major areas: (1) current business conditions, (2) business conditions over the next six months, (3) current employment conditions, (4) employment conditions in the next six months, and (5) and total family income for the next six months.

Consumer Sentiment Index or the Michigan Consumer Sentiment Index (MCSI) is also a national survey. Like CCI, it surveys the American households but on a smaller scale of around 500 households. The survey compiles information on consumer expectations of the economy focusing on seven key areas: (1) current economic index, (2) expected economic index, (3) current personal finances, (4) person finances expected, (5) buying conditions durables, (6) business conditions 1-year out, (7) and business conditions 5-year out. MSCI survey has more detailed questions, and as such, can be a better proxy to measure spending issues like gasoline and food consumption.

The interpretation of the two surveys tends to be the same. Look for changes in the number from the prior month, specifically, the directional trend changes of the numbers. If the numbers are in a rising trend, it implies consumers are optimistic about their future, hence more consumer spending. On the other hand, if the trend is declining, it warns of consumers less willing to spend in the future.

A sharp rise in commodities such as escalating gasoline prices or a sudden drop in the stock market can quickly impact the sentiment numbers and trends. Followers of sentiment indicators note that since the Conference Board CCI tracks larger households, the survey tends to be more reliable in identifying the sentiments associated with the job market and job security.

When President Biden took office on January 20, 2021, the University of Michigan Consumer Sentiment Index was trading at 77.98 as it trended higher toward 88.30 by the end of March. However, MCSI soon fell sharply to a low of 70.30 in July. It is currently hovering near 72.80. According to the recent Gallup poll, the President's approval rating has fallen sharply from 57% to 43%. Some political pundits compare the sharp decline in the President’s approval rating to the former President Obama. When Obama took office in January 2009, Obama enjoyed a healthy 68% approval rating. The MCSI stood at 57.88 as it rallied sharply to a high of 77.50 two years later. However, soon afterward, MCSI began to plummet sharply, subsequently trading to a low of 55.80. At the beginning of the second quarter of 2011, President Obama's approval rating also plummeted sharply toward 40% or nearly one year before the next Presidential Election in November 2012. Obama's predecessor, President George W. Bush, witnessed strong correlations between the sentiment indicators and his approval rating.

The Conference Board’s Consumer Confidence Index (CCI – 97.70) has been in a sharp downtrend as it violated its May 2020 reaction low (98.27). The key support resides near 97.13-97.14, coinciding with the Jan 1982 and Oct 1990 lows. Note that during the prior periods, it coincided with U.S. recessions. Below 97, warns of a deeper downturn, possibly toward 95.72-96.36 (Nov 1974, Apr 1980, Jan 2009, and Aug 2011), also turbulent economic conditions and volatile periods in the financial markets.

The University of Michigan Consumer Sentiment Index (MCSI – 72.80) has briefly broken its Covid-19 pandemic low of 71.80 (March 2020), generating a lower low at 70.30 (Jul 2021). Since then, the index has rebounded to a current level of 72.80 (Sep 2021). Can MCSI recover? Or does this signal the next downturn to crucial support at 65.70-67.50 (Jul 2009, Oct 2009, and Feb 2011). The Apr 1980, Oct 2008, and Jul 2011 lows at 51.70, 55.30, and 55.80 remain major reaction lows.

In summary, consumer confidence and consumer sentiment surveys have correlated closely with financial markets (i.e., the stock market). The sentiment indicators measure the confidence levels of Americans in their financial well-being, which influence their spending habits, savings rate, investment decisions. Although the sentiment indicators can swing widely, they can help foretell future price movements in U.S. stocks. Because investors tend to vote with their wallets and pocketbooks, the existing downtrends in the sentiment indicators do not bode well for the incumbent party heading into the next mid-term elections.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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