History may not repeat but it certainly rhymes and when it comes to the animal spirits of human fear and greed, nowhere is that more evident than the 'surveys' of confidence that US citizens have undertaken for thelast 30 years. As the following two charts show, while many are exuberant at the rise in confidence of late, it is a pattern we have seen play out twice before - and both previous times - it did not end well...
via Citi FX Technicals (charts recreated via Bloomberg),
The consumer confidence chart may remain an important factor in this equation
Chart of consumer confidence remains amazingly cyclical
Very clear trend so far of lower highs and lower lows. Since the all-time high in May 2000 at 144.70 we have been in a clear downtrend
Data on this indicator only goes back to Feb 1967 and prior to the all-time high in 2000 the peak had been 142.30 in October 1968 (right at the start of the lost 16 year period from 1966-1982)
LET US BE CLEAR there is no certainty at this point that a high has been posted in this move...but there are good reasons to suspect that it may have been (or at least that we are very close to that dynamic). If the chart above is consistent then the peak may well come from either the May or the June number.
The top of this channel comes in at 76.30 with the May number coming in at 76.20.
As can be seen above there has been a very close correlation in time frame in the 1998-2000; 2005-2007 and 2011-2013 moves. That would suggest that the peak in this number would likely be somewhere around present levels and in the May-July period (June would be an exact equal timeframe, to the other two moves)
Why might this be important???
One of the things that has performed better now than the 1970’s period and the early 1990’s period is the equity market. Or has it?
The post housing collapse rally in the equity market did not quite regain the 1973 high before a renewed 18 month fall of 27% whereas this market did regain the high. However it took twice as long (4 years instead of 2) as well as QE 1, 2 and 3 with massive fiscal stimulus to achieve those heady heights. Is that really a better performance???
By February 1994 when Greenspan tightened the S&P 500 had overcome the July 1990 peak by 79%. Admittedly this was after a much shallower fall of around 10 %, but from a wealth effect perspective provided a far bigger relative new high than today.
In addition when we look at the chart below we cannot help be a little cautious (Albeit recognizing that this is an environment where you have to be a skeptical participant on the move to new highs)
We are getting “relative triple divergence” between consumer confidence and the equity market. As the S&P has hit a high, higher high and now 3rd higher high consumer confidence has hit a high, lower high and lower high again. This suggests a larger disconnect between the level of “feel good” at the consumer level and the elevated level of the Equity market in an economy that is about 70% consumer driven.