Soaring Consumer Confidence May Not be Positive for Markets

Consumers are more optimistic than they have been for the past 17 years, writes Steven Russolillo in a recent Wall Street Journal article, but this isn’t necessarily good news for contrarian investors.

Historically, the article points out, markets have performed best when economic expectations are diminishing, not when they’re sunny. It refers to the Citigroup Economic Surprise Index as a gauge of economic data relative to forecasts. The index, which moves above and below zero, moves higher when reports are beating estimates and lower then data falls beneath expectations. The index, says Russolillo, has been “on the upswing for months and rose to 58 last week, a fresh three-year high. Maintaining that trajectory won’t be easy.”

Forecasters, in their increasing optimism, may not be correctly extrapolating recent trends, the article argues, and “that is typically what prompts the surprise index to decline, with stocks often following suit.”

The better the economy does, writes Russolillo, the more upbeat forecasts become but, ultimately, such a trend may not be sustainable. “Investors,” he warns, “should watch this space. In this age where markets keep rallying without much opposition, this is one leading indicator worth keeping tabs on.”

Citi Index