American consumers are currently feeling bullish concerning the current state of Wall Street and the stock market. A healthy job market has contributed to consumers feeling the most confident about the market than they have been in the last twenty years.
The Conference board reported near 18-year highs in terms of consumer confidence regarding the stock market. This report found the same findings as an earlier report this month from the University of Michigan.
However, this may pose some bad news, particularly for investors. This is because consumers are known for being too optimistic at the top of a market cycle.
These high levels of confidence by consumers may be an indication of some tough times to come in the near future. These tough times may already be starting, as stocks are beginning to pullback because of concerns over possible trade wars that could be developing.
High confidence is a sign of strength in terms of economics according to investment strategist William Delwiche. Delwiche also explains that high confidence can also signal the less desired effect of maximum prices.
Delwiche explained that consumer sentiment levels often follow the market and the previous two readings from the past few weeks. In other words, these reports are based on stock market confidence prior to recent trade tensions.
Delwiche warns that the recent decrease in stocks and long-term bond yields may be a better indicator of sentiment than last month’s consumer confidence analysis. The United states ten-year yield has recently hit its lowest level since September of 2017.
This recent drop in stocks and yields may not be enough to lead to a recession. However, it could mean that earnings and economic growth have peaked for the foreseeable future.
Chief economist for the Americas at Natixis said in a report Tuesday that although not projecting a downturn, the financial markets seem to be indicating currently that the economy is slowing.
If the job market remains in a healthy state, Delwiche thinks consumer spending should remain growing at a steady pace. This would decrease the need for the Federal Reserve to lower interest rates, which is what the Trump Administration has been asking for.
It may only be a matter of when in terms of high consumer confidence eventually leading to a downturn.
Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co., explained that one of the biggest things he hears from investors currently is that the market looks great and to not worry about a recession happening.
Kleintop also revealed that every time consumers have a bullish attitude as they do right now, there eventually was a sharp downturn shortly after, particularly in the last few decades.
Kleintop stated that over the past thirty years, the current consumer confidence level was this high only in the years 2007, 1998-2001, 1994, and 1990. All of these periods were immediately followed by bad times in terms of the market for consumers and investors.
Only time will tell whether current consumer confidence does indeed follow this trend.