Consumer Confidence and Forward Returns of the S&P 500

John Templeton may possibly have been the greatest investor of all time.  He shared 22 guiding principles with William Proctor for his book, The Templeton Touch.  Of the 22, I regard number 4, “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell”, as the most important, yet the most difficult to follow, as it is almost impossible to accurately judge the state of pessimism.

However, measuring the current state of pessimism has been made much easier due to The Conference Board, a global independent business membership and research association. The Conference Board releases the Consumer Confidence Index each month, which is based on a probability-design random sample survey conducted by Nielsen.

In October the Conference Board Consumer Confidence Index declined to 39.8 (1985=100), the fifth lowest monthly level in the past 35 years.   Lynn Franco, Director of The Conference Board Consumer Research Center said this about October’s report: Consumer confidence is now back to levels last seen during the 2008-2009 recession. 

Our own beliefs mirror John Templeton’s. We find that common stocks are cheapest when the mood is low and the economy is struggling. We have prepared two tables that should be beneficial to those of you sitting on the sidelines waiting for better times to invest.  The first table displays the 12 month forward returns of the S&P 500 from the month the Consumer Confidence Index level was less than 51 over the past 35 years.  Of the 17 complete periods, 15 were positive with an average gain overall of 16.91%.  Of the four times in the past 35 years the index was less than the current level of 39.8, the S&P 500 gained, on average, 31.81%. 

The second table demonstrates the twelve month forward returns of the S&P 500 from the ten highest readings of the index over the past 35 years.  In this case, 8 of the 10 resulted in negative returns averaging -9.0%