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Why the spike in consumer confidence may not be a good thing

Published: Wednesday, May 29 2013 2:35 p.m. MDT

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The recent spike in consumer confidence should worry you, at least that’s what Mark Hulbert wrote in his article “Yet another reason to be scared” for MarketWatch.

Hulbert’s basic reasoning is that history has shown the stock market tends to do better following large drops in consumer confidence, not large jumps.

“I know it strikes many as counterintuitive to worry about a big jump in consumer confidence,” Hulbert wrote on Wednesday. “But that’s what I am doing after analyzing the Conference Board’s Consumer Confidence Index over the last three decades.”

In his research, Hulbert correlated each month’s change in the confidence index with the stock market’s subsequent performance. He found that the biggest jumps on the CCI were generally followed by lackluster returns, while a decline in the index often signaled above-average returns.

The highest level of consumer confidence in the past 25 years according to the CCI, Hubert points out, was early in the year 2000.

“That’s right,” he wrote, “just before the Internet bubble burst.”

The moral of the story, according to Hubert, is not to get carried away by the deceptively positive news that consumer confidence is at its highest level in five years.

JJ Feinauer is a graduate of Southern Virginia University and an intern for the Moneywise page on DeseretNews.com. Email: jfeinauer@deseretdigital.com, Twitter: @johnorjj.

Read more about consumer confidence on MarketWatch.

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