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Consumers, Confidence, and a Time to Buy

U.S. News and World Report Smarter Investor

Low confidence levels could signal an impending rebound.

Given the recent market volatility, many investors are searching for some sanity in what feels like a crazy world.

The whipsaw moves caused by the European debt crisis and mixed domestic economic data are enough to drive investors to consider low-paying CDs as a serious investment option. However, after many years of professional investment experience and research, I advocate another view.

A strong foundation

If you are familiar with the study of economics, you’ve heard this before: Consumer spending is the engine of economic growth. Indeed, consumers are woven into the beginning, middle, and end of the story of most of today’s global economy.

Based on data released by the U.S. Department of Commerce in late October, Personal Consumption Expenditures (PCE) accounted for more than 71% of U.S. GDP. The largest component of those expenses is driven by the highest income earners, and from my experience with wealthy clients, they haven’t slowed spending, even with the recent market turmoil.

In the past, this consumer demand has acted as a strong foundation for the U.S. economy to rebound from difficult periods. Ultimately, we’ve seen throughout U.S. history an implacable capacity to buck a trend, especially a negative one. More recently, we’ve seen the data support this optimism. With GDP growth rates positive—and growing at an increasing rate—it is less likely we’ll see a “double dip” recession in the short term.

Sentiment is key

With all of the above as a prologue, what our clients consistently ask is, “OK, what now?” It’s hard to predict the future, but one set of data has been prescient: consumer sentiment. Historically, the worse the U.S. consumer feels, the better the future returns of the S&P 500 Index.

The Conference Board has been tracking consumer sentiment through its Consumer Confidence Index for about 35 years. We are now approaching the lowest levels on record since about three years ago at the depths of the U.S. credit crisis. In fact, there have only been three readings as low as October 2011’s of 39.8 (October 2008, February 2009, and March 2009). This doesn’t mean that we won’t see lower stock prices from here. However, the historical average returns from these low levels have been more than 30 percent annually.

Time to buy (or hold and get ready for a rally)

I think it’s time to hit the punch line: For long-term investors, consider buying stocks.

I’m not suggesting that you should take more risk than you are comfortable with, or borrow money, buy, and hope for the best. I am saying that there has not been even one time in the past 35 years that we’ve seen U.S. consumers as uncertain as they are today without soon afterwards seeing seriously powerful stock market returns. As evidence, let’s take a moment to listen to two of history’s most successful investors: Sir John Templeton and Warren Buffett. Sir John Templeton has been quoted as saying, “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Unfortunately, Sir John is no longer with us. Mr. Buffett, however, has put almost $24 billion to work in the past three months, according to CNBC.

It’s possible that Warren Buffett is wrong. It’s possible that the market will crash again, and the economy will tank. It’s possible that U.S. consumers will stop a 50-plus year run of working hard and buying what they want. I doubt any of that will happen.


Read the article on U.S. News & World Report here! >>


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