• 2 hours TikTok Takes Center Stage In US-China Tech War
  • 10 hours Are Semiconductor Stocks Overvalued?
  • 1 day Jobs Report Doesn’t Say Much Amid COVID Uncertainty
  • 1 day Crypto FOMO Heats Up As Bitcoin Climbs Above $11,000
  • 2 days Aluminum Is Bouncing Back In China
  • 2 days The Deep-Sea Mining Debate
  • 3 days Markets Trending Down Despite Tech Blow-Out
  • 3 days Big Oil Battered On Dismal Earnings
  • 4 days Russian Billionaire Bails On Mid-Sized Gold Miner
  • 4 days Gold Stocks Gear Up For A Big Autumn
  • 5 days America Is Looking To Bring Nuclear Power To Space
  • 5 days What Is Behind Gold's Astonishing Rally?
  • 6 days Stocks Tumble On Brutal Economic Report
  • 6 days Kodak Soars By 400% After Trump Bump
  • 7 days U.S. Coal Production Falls To 42 Year Lows
  • 7 days Indonesia Moves To Bolster Mining Sector
  • 8 days The U.S. Dollar Is Losing Ground As A Reserve Currency
  • 8 days Gold Prices Soar To Record Highs As Dollar Dips
  • 9 days Republicans Unveil Stimulus 2.0
  • 9 days Big Oil Is Back On The M&A Game
How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

Jes Black

Jes Black

Jes Black, hedge fund manager at Black Flag Capital Partners, specializes in foreign exchange and global macro trends. Prior to organizing the fund he helped…

Contact Author

  1. Home
  2. Markets
  3. Other

Consumer Sentiment and the Stock Market...

Stocks may be in the beginning stages of a protracted decline brought about by the shifting tide of investor optimism. Surprising Wall Street on Friday was a steep decline in the University of Michigan's consumer sentiment index, falling to 87.5 from 96.8. The index peaked earlier this year concurrent with the top of the major stock indices.

There is a natural order to all things human. As such, the persistent bullishness that pervades every aspect of the stock and bond markets will soon come to pass. Since the market is really just an expression of investor optimism we can find clues to forecast stock market trends by charting consumer sentiment. Therefore we present to you our analysis of the long-term trend in the University of Michigan's sentiment index.

In the chart below we have graphed the UoM sentiment index going back to 1978. The 27-year study of consumer sentiment is enlightening in one key respect: Each major downturn has been milder than the last representing a bull market in enthusiasm about US prospects. The basing process in the stock market in late 2002 and early 2003 saw the UoM survey fall to a 10-year low of 79. Yet remarkably, sentiment ricocheted off the rising trendline support from the 1980 nadir of 51.7 through the 1990 low of 63.9.

The second thing that stands out is that the 80/90 levels mark key support/resistance and correlate well with the health of the economy. When the survey held above 90 the economy has been in expansion; below 80 in recession. The move back below 90 indicates that the economy is slowing. Yet a break below 80 this time could be more severe as it would represent a reversal of the 27-year trend in rising optimism. This would most assuredly lead to a dramatic decline in the stock market, a recession and possibly an escalation of military conflict.

Psychologically, the Dow's break of 10,000 last week following the disappointing payrolls report may be the catalyst to get things rolling to the downside. Mind you we aren't congenitally bearish. We just focus on inflection points and this market has shown extreme optimism while ignoring the deteriorating fundamentals.

Our core position since this bear market began was that deflationary cleansing is required in order to make room for new borrowing and the next boom. It is therefore impossible to "jumpstart" an economy a la Keynes until the debt is cleared away. That is why he said run deficits in bad times and pay them down in good. Corporations have done this but the nation as a whole financed a mini-boom with unprecedented debt accumulation. On the surface that looks good but must be matched by rising payrolls and the income they generate to pay back the borrowing. As I see it, this hasn't happened and the credit card bill is due in the mail.

Recent Testimonial for FX Money Trends: "I find FX Money Trends' work extremely helpful. As a macro hedge fund manager I base my success on ideas generated both internally and through external research services: FX Money Trends and its founder Jes Black constantly provide ideas which are based both on very clever fundamental and technical analysis and research. FX Money Trend's intellectual independence makes their ideas precious, never obvious nor "late." - Francesco Clarelli, Italy.

Back to homepage

Leave a comment

Leave a comment