The Convention Board’s Client Confidence Index (CCI) in March registered certainly one of its largest jumps ever, hovering 21.3%. That may look like unambiguously good financial information.
However in the meantime, the College of Michigan’s Client Sentiment Survey in March rose 10.5%, lower than half as a lot. Some analysts assume this divergence places a far much less bullish interpretation on the CCI’s in any other case spectacular rise.
Divergences between these two revered consumer-sentiment measures are comparatively uncommon. Take into account the correlation coefficient between these two indexes’ 12-month charges of change. This coefficient ranges from a theoretical most of 1.0 (within the occasion each sentiment measures’ 12-month charges of change are completely correlated with one another) to a theoretical minimal of minus 1.0 (within the occasion that the 2 measures transfer precisely inversely to one another, with one rising when the opposite one falls, and vice versa).
For the reason that late Seventies, which is the earliest date for which month-to-month knowledge can be found for each indices, the correlation coefficient is extraordinarily excessive (and statistically important) at 0.82.
This usually excessive correlation is one motive why some analysts assume it’s important when the 2 indexes diverge. One more reason: Divergences don’t seem to happen randomly however as a substitute are likely to comply with the market cycle, with excessive divergences usually previous a recession.
I received this perception from James Stack, editor of the Investech Analysis publication. One of many many indicators he focuses on is calculated by subtracting the Convention Board’s Client Confidence Index from the College of Michigan index. At present, for instance, this indicator stands at minus 24.8. (Full disclosure: Stack’s publication will not be a kind of that pay a flat charge to my auditing agency to calculate its observe report.)
The chart under offers some historic context. The most recent divergence is decrease than 86% of different months’ readings for the reason that late Seventies. The chart additionally reveals the dates of recessions on the calendar maintained by the National Bureau of Economic Research, the semi-official arbiter of when recessions start and finish within the U.S. Discover how the indicator usually reaches a low a number of months upfront of when recessions start.
It’s on this context that the patron sentiment indexes’ soar in March takes on less-than-bullish significance. Over the few months previous to March, as you’ll be able to see from the chart, the divergence between the 2 indexes had been returning near the zero line — which is typical of its sample popping out of recessions. By turning down once more, the divergence questions the widespread narrative that the U.S. economy is about to surge because the nation emerges from pandemic-induced lockdowns.
Chart readers would possibly even see a parallel between the divergence’s surprising flip downward and its conduct after the primary of the double-dip recessions of the early Nineteen Eighties.
Divergences between these two shopper indexes hint to delicate variations in what they measure. Stack has identified that the College of Michigan survey extra closely emphasizes shoppers’ attitudes in the direction of their fast private circumstances, whereas the Convention Board index extra closely displays shoppers’ attitudes in the direction of the general economic system usually. Damaging divergences, equivalent to the latest studying, imply that customers are extra upbeat in regards to the U.S. economic system than they’re about their very own private scenario.
Mark Hulbert is an everyday contributor to MarketWatch. His Hulbert Rankings tracks funding newsletters that pay a flat charge to be audited. He could be reached at email@example.com