Large Drops in Consumer Confidence and Their Impact on Stocks

Yesterday, we noted that blaming the market's decline on the weak Consumer Confidence report was somewhat misplaced.  Afterall, if the consumer is so weak, why did consumer stocks hold up better than the rest of the market?  That being the case, investors are still likely to hear arguments that equities can't rise given the weak sentiment among consumers. 

February's 19% decline in Consumer Confidence was only the sixth time in the last decade that the indicator has declined by 15% or more in a month.  In the chart of the S&P 500 below, we have overlaid red dots for each of these occurrences.  Following these prior periods, the market has hardly been weak.  Over the next week, the S&P 500 has averaged a return of over 10% with positive returns four out of five times.  One year later, the S&P 500 has averaged a gain of over 23% with positive returns every time.  The most recent occurrence came in February of 2009, when Consumer Confidence declined 32%.  Since then, the S&P 500 is up just under 50%.

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