How Much of a True Contrarian are You?

The US has reached extreme consumer pessimism. That’s the reading given by the latest consumer sentiment numbers, which show a sharp fall in the spending outlook for many US households. Extreme pessimism has traditionally been lagging indicator; in other words, once it reaches a low, it usually signals the worst is over. The theory is, the consumers are the last to know of how bad an economy is, so by the time they do know, the cycle has already passed. According to a research study by Meir Statman:

Low consumer confidence is followed by high stock returns more often than it is followed by low stock returns.

Before you all go out and go long on everything to do with stripes and stars, it is just one indicator, and there’s a myriad of reasons why this time might be different. That doesn’t phase me though; exceptions to the rule are much more fun to study!