Consumer spending accounts for nearly 70% of nominal U.S. GDP. Therefore, consumer sentiment must have some relationship with market developments.
Financial journalists definitely act as if this were the case. Whenever latest sentiment or confidence numbers – consumer or otherwise – are released, experts jump into motion and speculate about what impact the information can have on markets and the broader economy. But how vital are these measures actually for market performance?
To answer this query, we examined the relationships between consumer and business sentiment metrics and market returns. Specifically, we examined the monthly data of the University of Michigan Consumer Sentiment Indexof the Conference Board US consumer confidence index (CCI) and the Business Confidence Index (BCI) and compared their relationship to the performance of nine different MSCI stock and bond indices dating back to the Nineteen Seventies, specializing in U.S. high-yield bonds, U.S. long-term bonds, U.S. short-term bonds, U.S. aggregate yield bonds, and U.S. growth stocks. US value stocks, US small caps, US large caps and international stocks.
Overall, we found no significant or sustained correlation between market returns and the three sentiment measures over your entire sample period of greater than 50 years. The highest correlation between the University of Michigan Consumer Sentiment Survey and U.S. small-cap stocks was a weak 0.21.
Correlations between changes in consumer confidence indices and investment returns, Nineteen Seventies to 2020s
| Michigan Consumers Mood index |
Consumer Confidence Index (CCI) |
Trade secret Index (BCI) |
|
| US high yield bond | 0.18 | 0.17 | -0.01 |
| Long-term US bond | -0.01 | 0.04 | –0.10 |
| Short-term US bond | -0.01 | 0.03 | -0.11 |
| US bonds | -0.01 | 0.08 | -0.13 |
| US growth | 0.14 | 0.12 | 0.07 |
| US value | 0.17 | 0.15 | 0.07 |
| US small cap | 0.21 | 0.14 | 0.11 |
| US Large Cap | 0.15 | 0.15 | 0.06 |
| International | 0.15 | 0.18 | 0.12 |
But over time, the correlations show some telling trends.
The University of Michigan Consumer Sentiment Index’s correlation with stock returns has decreased. In fact, it has fallen steeply since 2010 and is not any longer statistically distinguishable from zero.
University of Michigan Consumer Sentiment Index: Historical Market Correlations
| Nineteen Seventies | Eighties | Nineteen Nineties | 2000s | 2010s | 2020s | |
| US high yield bond | 0.24 | -0.05 | 0.34 | 0.35 | -0.09 | 0.20 |
| Long-term US bond | 0.24 | -0.19 | 0.01 | 0.17 | -0.13 | -0.07 |
| Short-term US bond | 0.23 | -0.09 | -0.09 | 0.05 | -0.16 | 0.14 |
| US bonds | 0.22 | –0.15 | -0.01 | 0.13 | -0.18 | 0.09 |
| US growth | 0.09 | 0.29 | 0.12 | 0.24 | -0.04 | -0.05 |
| US value | 0.13 | 0.27 | 0.11 | 0.31 | -0.07 | 0.01 |
| US small cap | 0.08 | 0.33 | 0.18 | 0.36 | 0.00 | 0.04 |
| International | 0.08 | 0.31 | 0.10 | 0.28 | -0.12 | 0.06 |
| US Large Cap | 0.11 | 0.25 | 0.13 | 0.28 | -0.03 | -0.02 |
| International | 0.08 | 0.31 | 0.10 | 0.28 | -0.12 | 0.06 |
However, the CCI has had the biggest positive correlation with stock returns because the 2000s. And as of 2020, correlations between stocks and bonds have averaged a reasonably significant 0.30.
Consumer Confidence Index (CCI): Historical market correlations
| Nineteen Seventies | Eighties | Nineteen Nineties | 2000s | 2010s | 2020s | |
| US high yield bond | 0.25 | 0.014 | 0.16 | 0.15 | 0.20 | 0.35 |
| Long-term US bond | 0.09 | 0.01 | -0.04 | -0.02 | -0.09 | 0.26 |
| Short-term US bond | 0.04 | -0.04 | -0.09 | -0.09 | 0.10 | 0.34 |
| US bonds | 0.16 | 0.03 | -0.07 | -0.04 | 0.05 | 0.36 |
| US growth | 0.00 | 0.01 | 0.03 | 0.25 | 0.18 | 0.22 |
| US value | 0.04 | -0.01 | 0.04 | 0.30 | 0.19 | 0.27 |
| US small cap | 0.08 | 0.01 | 0.06 | 0.22 | 0.17 | 0.32 |
| US Large Cap | -0.02 | 0.01 | 0.04 | 0.29 | 0.18 | 0.24 |
| International | 0.03 | 0.01 | 0.10 | 0.28 | 0.22 | 0.41 |
The BCI shows an identical trend. The BCI recorded the very best positive correlations with stock return metrics, with the recovery starting within the 2010s.
The Business Confidence Index (BCI): Historical market correlation
| Nineteen Seventies | Eighties | Nineteen Nineties | 2000s | 2010s | 2020s | |
| US high yield bond | -0.29 | –0.15 | 0.03 | 0.13 | 0.19 | 0.22 |
| Long-term US bond | -0.35 | -0.21 | -0.11 | 0.05 | -0.06 | 0.09 |
| Short-term US bond | -0.12 | -0.17 | -0.22 | 0.04 | 0.06 | 0.06 |
| US bonds | -0.39 | -0.18 | -0.16 | 0.08 | 0.06 | 0.14 |
| US growth | 0.14 | -0.04 | 0.07 | 0.09 | 0.20 | 0.11 |
| US value | 0.05 | -0.09 | 0.05 | 0.10 | 0.23 | 0.23 |
| US small cap | 0.13 | -0.02 | 0.10 | 0.15 | 0.23 | 0.23 |
| US Large Cap | 0.06 | -0.09 | 0.07 | 0.09 | 0.21 | 0.17 |
| International | 0.11 | 0.01 | 0.15 | 0.16 | 0.17 | 0.28 |
The indisputable fact that markets are more closely correlated with the CCI and BCI than with the University of Michigan Consumer Sentiment Index has several possible implications. Perhaps the CCI and BCI have gained prestige over time in comparison with the Michigan index, and now the market is paying more attention to them. Or perhaps their methods higher reflect an evolving market and economy.
Whatever the causes of those phenomena, given the relative weakness of those correlations, the larger conclusion is that financial journalists and commentators could also be inferring more meaning from these metrics than they warrant.
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Photo credit: ©Getty Images / Natee Meepian
