Mar 4, 2008

Consumer Confidence and Stock Market Returns - Part 2

Continued from earlier part of this posting on Consumer confidence.

The consumer confidence and Stock market returns paper authored by Ken Fisher and others can be found here.

The paper says that:
"There is a negative and statistically significant relationship between the level of the expectations component of the Conference Board consumer confidence in one month and Nasdaq and small cap stocks in the following month".

Since I did not manage to get historical Conference board Confidence Index data freely on the Internet, I decided to see how University of Michigan Confidence Index correlates with NASDAQ performance. But, let me know if Conference board Consumer data is available for free anywhere on the Net.

Take a peek at the graph below for "UMich CCI vs. NASDAQ". I did not see any predictive ability for University of Michigan Consumer confidence Index (CCI), except the case in late 2007 where the CCI takes a downturn even before NASDAQ starts slipping. I tried few other cases like, 3 month moving averages and year over year changes, but none of them yielded a conclusive relation between UMich CCI and NASDAQ. I tried similar tests for S&P 500 too, but they came back with the same results.


I tried another experiment on the same data set. If re-read the quote from the paper above, it compares consumer confidence index in one month against the stock market index in the NEXT month. This essentially reveals if CCI has any predicting ability. I took this experiment little further and checked if correlation exists between Consumer Confidence Index this month and the NASDAQ/SP500 performance after two months. Similarly after three months, four months and so on. The graph below shows the correlation coefficient for NASDAQ index and S&P 500, against Univ of Michigan Confidence index. The length of duration for the correlation was from 1978 till 2008 February.


I deduced the following two inferences from the above chart.

1. The UMich CCI is a better predictor of NASDAQ/S&P 500 performance after 10 months than the next month. The margin of improvement is not significant though.

2. The Univ of Michigan Confidence Index varies with stock market indexes (NASDAQ, S&P 500) and the general correlation hovers around 0.5.

At the end of this exercise, did I get any actionable info that I can use to my trading? Do you see any other inferences from these charts?

-Nidhi