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Sound Advice: July 13, 2022

The markets reflect changes in consumer confidence 

Investors always look to the future.  When prospects are bright, they look far ahead.  When times are problematic, it often seems like they’ve swapped their telescopes for microscopes.  And, not surprisingly, what takes place during more troublesome periods is increased stock price fluctuation. At those times, confusion reigns the day and thoughts about what lies ahead run the gamut from “Everything will be OK” to “It’s the end of the world”.

Since the start of the current millennium, weakness in the monthly Consumer Confidence Index (CCI) has always been accompanied by pullbacks in the U.S. stock market.  As the debacle began to unfold in late 2001 when companies with “brilliant concepts” but no profits fell by the wayside, the CCI plunged 28.6%.  At the same time, the S&P 500 Index dropped 6.9%.

There was much more to come from the Summer of 2002 to the Spring of 2003.  Over that span, the downward spiral in the CCI accelerated, with a loss of 44.3%.  In recognition of that change, the S&P went down 20.5%.

The biggest swing of all in the CCI took place during the banking crisis of 2007-8.  As the financial world was in a frenzy about the possibility of a collapse in the banking system, the CCI nosedived by 55.0% while the S&P slipped by 6.5%.

So here we are a decade and a half later and the CCI is again on a downslope, having fallen by 14.3% since the beginning of this year.  Unlike earlier periods, when the market drop had been smaller than the reduction in the confidence index, this year the situation reversed itself.  The fall in the S&P has been a third greater than that of the confidence index.

Why the bigger reaction this time?  Probably thanks to combination of factors, including continuation of the pandemic, the conflict in Ukraine, and hyperinflation.  And let’s not forget the possibility of economic recession, which may already be under way. 

Three months ago, it appeared that the economy was still growing, but the actual numbers showed that the Gross Domestic Product had shrunk during the first calendar quarter.  For the second quarter, forecasters are again looking for a modest gain, but the actual numbers may show another dip.  If so, that would meet the definition of recession.

Markets always go down on the way into a recession.  And then recover.  Once the market averages reach bear territory, a loss of 20% or more, the path of least resistance is up.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883


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