Adapted from a Letter Sent to My Private Wealth Management Clients on June 17, 2022

With challenging economic and market news, I wanted to share with you one of my new favorite pieces of research.

If you aren’t feeling particularly optimistic about the economy right now, the University of Michigan’s Consumer Sentiment Index (“MCSI”) confirms that you are not alone (click “Max” or other columns to see the long-term confidence numbers)! This widely followed monthly survey measures how consumers feel about the economy, markets, and business environment. Inflation, gas prices, and a general gloomy outlook amongst the people surveyed caused the June index reading to fall to 50.2—its lowest level since the 1980 recession! The MCSI’s long-term average is 85.6, and in February of 2020, just before the pandemic crash, it read 100.

J.P. Morgan’s analysts have taken a very interesting look at how the MCSI readings have correlated with market returns over the past 50 years (this chart ends with the May 2022 confidence reading of 58.4):

Poor consumer sentiment readings should indicate poor stock market returns, right? Everything looks terrible, and there is great knowledge in the wisdom of crowds…or is there?

In the J.P. Morgan chart above, you’ll see they found eight peaks in confidence, and eight valleys in sentiment since 1971 (each measured by the blue dots on the chart). The jagged gray line charts the monthly MCSI readings, while the bold black type shows the one-year S&P 500 stock market return following each high or low in sentiment. Amazingly, the one-year average stock returns following the valleys (+24.9%) trounced stock market returns following the peaks in confidence (+4.1%)!

These are, of course, historical readings, and each economic cycle has its own facts and circumstances and will deliver its own unique pattern of returns. However, this research does provide an updated and quantitative reinforcement of the value of maintaining investment discipline, not falling for the madness of crowds, and exploring potential opportunities. In the words of Baron Rothschild, famous 18th century banker, “The time to buy is when there is blood in the streets.”

Have courage, my friends! While security prices are down, in many ways it is are more attractive to own shares of quality companies during valleys in confidence than when now than when optimism reigns!

If you have any questions about the market or your portfolio, please let us know if you would like to talk!

Clearly, many people are feeling down about the economy right now; however, we know that a contrarian mindset and approach have often come out on top over the long-haul! Here are some of my additional thoughts and research pieces, which should help lend confidence to your investing during difficult times:

Ignore Media Noise

Stocks are Falling: Should I Sell?

Money Matters: Human Behavior & Investment Strategies Designed to Beat the Stock Market

Sincerely,

Scott