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Consumer Confidence Plummets, And That’s Usually Good

Consumer Confidence Plummets, And That’s Usually Good

For many Americans, 2022 has been very disappointing on many levels, with the Omicron variant prolonging the pandemic, sharply rising inflation and interest rates, a cratering stock market, and the shock of Russia’s invasion of Ukraine.

These factors, combined with a still very partisan political environment, have driven consumer sentiment down to its lowest level on record.

As counterintuitive as it sounds, when consumer confidence plummets it is usually a good sign for investors and the stock market.Consumer Confidence Plummets, and That's Usually Good


When investors feel gloomy and worried about the economic outlook, the natural human tendency is to sell risk assets in general and stocks in particular. History shows that this will likely work against you. The chart above shows consumer sentiment over the past 50 years with 8 distinct peaks and troughs, and how much the S&P 500 gained or lost in the 12 months following. On average, buying at a confidence peak returned 4.1% while buying at a trough returned 24.9%.

Of course, this is not to suggest that U.S. stocks will return 25% in the year ahead, as many other factors will determine that outcome. However, it does suggest that when planning for the rest of 2022 and beyond, we need to focus on fundamentals and valuations rather than how we “feel” about the world.

Stocks Have Been Hammered

Up until the market rally this past Monday and Tuesday, the S&P 500 was down around -25% year-to-date. And to add insult to injury, bonds have not been the ballast they’ve been historically in down markets – although they are down much less than stocks.

Luckily, stocks don’t drop more than 25% very often. And again, we can look to history for some guidance going forward.

When the S&P 500 is Down 25%

As the chart above illustrates, after losses of this magnitude stocks have generally performed very well in subsequent years. It makes sense – stocks are now at more attractive valuations and this increases their expected rates of return in the future.

Stock Valuations Are Attractive

U.S. equities slumped into a bear market in the first half of 2022, recovered much of their losses by mid-summer and slid again as investors worried about inflation, aggressive Fed tightening, and the threat of recession.

By most measures, stocks are now trading at much more attractive valuations.

S&P 500 PE Ratio


The S&P 500 forward P/E (price to earnings) ratio is now below its 25-year average, setting us up for better performance in the long run.

Taking a Step Back

I know very well that all these charts, graphs, and data points don’t mean a damn thing (or lessen the pain) when you open an account statement and see severe losses in your portfolio. I get it.

Years like 2022 will test any investor’s fortitude and can cause us to lose sight of why we’re investing in the first place. And this includes professional money managers.

We always try to bring a historical perspective into our stock market discussions because it matters. Without a good understanding of historical market performance, volatility, bull/bear cycles, recessions, etc., it makes it harder to hang on during times of extreme distress.

Just look at what we’ve been through in recent memory.

stock market total returns


I started my investments career in 1999, just in time for the Tech Bubble Peak and subsequent crash. As always, the market recovered and enjoyed years of solid returns up until the Great Financial Crisis of 08-09 when everything fell off a cliff in the worst downturn since the Great Depression.

However, since the Financial Crisis began in 2008 (almost 15 years) stocks have returned 633%. And this includes the COVID-19 pandemic that hit in 2020 and the dumpster fire that is 2022.

And our founder and president, Mike Booker, has experienced decades more than I have in the market. And through it all, we would both agree that investing in the stock market is the best financial move we could have ever made.

Yes, every five years or so the market throws some serious pain our way. And it’s still worth going through to achieve your financial goals in the long-term.

The market has already experienced serious pain this year, and stocks are on sale. That doesn’t happen very often. Could the market go down even further from here – of course. And nobody knows with certainty when or how the recovery will occur. But I do know with certainty that it will occur.

When people are sitting on cash they often ask, “Is this a good time to put money to work in the stock market?” Sure, there is always the risk that you put money in the market and it goes down another 20%. But at this point, as long-term investors, the greatest risk is not that stocks drop even further. The greatest risk is that you’re out the market (trying to time the perfect entry or re-entry) during the next 500% advance upward.

There is no announcement from the stock market when it bottoms out. It will turn swiftly and sharply, and you won’t know what hit you. Before you know it, and usually too late, you’re in the midst of another great bull market run.


Source: Clearnomics, J.P. Morgan Asset Management, Hamilton Lane



Mike Minter

Mike develops investment portfolio allocations, handles trading and rebalancing, and conducts research and analysis as a Portfolio Manager and Financial Advisor for the firm. As a perpetual student of investing and the markets, Mike considers himself obsessed with the subject. Mike has earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Certified Fund Specialist® designations. He is also an active member of the Houston chapter of the Financial Planning Association (FPA).   Read Mike’s Profile HereRead More Articles by Mike

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