Confidence Means Caution

Things are going great
And they're only getting better
--Timbuk 3

These pages have recently observed the weak relationship between high consumer confidence and future economic growth. Instead, confidence appears to be a coincident or perhaps even lagging indicator. Stated differently, consumer confidence is more reflective of present or past economic growth rather than serving as a harbinger of future strength.

That linkage is shown pretty clearly in this article. Consumer confidence is at historical highs. In the past, such highs suggest that economic expansion is late in the cycle and that recessionary periods are approaching.

Sanity check. The annualized return in the Russell 2000 when small business optimism is above 107 has been -3.5%. pic.twitter.com/rsZt4Dn94k

— SentimenTrader (@sentimentrader) September 11, 2018

Jason Goepfert chimes in, noting the low historical returns in small cap stocks when small business optimism hits high marks like current levels.

Historically, then, high levels of confidence about the economy should not inspire euphoria...but caution.