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Thinking about confidence




Here's a conundrum: consumer confidence is still at very depressed levels, yet there is no shortage of pundits calling for a double-dip recession and/or another major stock market decline.

Market bears cite evidence of overvaluation in stock prices and overbought conditions, while economy bears point to another wave of residential and commercial mortgage defaults, high unemployment, massive deleveraging, trillion-dollar deficits, and rising tax burdens, among other things.

A quick look at this chart, however, tells you that consumers are always worried about an economic relapse in the wake of a recession (once burned, twice shy, as the saying goes), but they are never worried about the future in the months just before a recession. I would wager that the same holds true for most pundits.

Very low consumer confidence has traditionally been one of the best buy signals for stocks. Why should it be any different now?

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