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Be Fearful When the Soft Data Is Greedy


Larry Fink is the CEO of Blackrock, the world’s biggest asset manager. When he spoke at the Yahoo! Finance’s All Markets Summit back in February, he spoke on a variety of issues, including the retirement challenges of individual investors. He surmised that most investors are not equipped to navigate the financial markets in building their retirement nest eggs. Fink made these comments after referring to a chart shown below demonstrating how the soft data of consumer confidence impacts stock prices.

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Larry Fink, the CEO of the world’s largest asset manager, Blackrock, found it “horrifying” that consumer sentiment was highly correlated to the S&P 500 index.

The chart above overlays: 1) the University of Michigan’s survey of Consumer Sentiment (red line), against, 2) the S&P 500 Index (blue line). Fink found it “horrifying” that the two metrics moved in almost perfect lockstep. What he said exactly was (emphasis added):

“When consumer confidence was the lowest, that the was low point of the equity markets and you should be buying. Maybe you should be selling now.” – Larry Fink, CEO, Blackrock (February 8, 2017)

When Fink said investors were not equipped to navigate the financial markets, what he was trying to say was investors are emotional with their money. They buy when emotions and stock prices are high, and they sell when emotions and stock prices are low. The chart was “horrifying” because investors should be doing the opposite as they build their retirement nest eggs.

Since Fink spoke in February, consumer optimism and other soft data rose even higher. The Consumer Confidence Index from The Conference Board (century-old research association) surged 25% in the 5 months to March. Its March level of 125.6 was also its highest in more than a decade.

Higher Confidence —> Lower Returns

Despite the short-term investment gains experienced in recent months, the potential for long-term gains have historically been weak. Illustrated in the graph below is a comparison of: 1) the Consumer Confidence Index, and 2) future 10-year cumulative, average, annual returns of the S&P Composite Index.

Consumer Confidence Index, Conference Board, Warren Buffett, Be Fearful When Others Are Greedy, Contrarian Investing, Robert Shiller,

Soft data provided by the Consumer Confidence Index looks to be a very good gauge of greed and fear.

The blue dots are the 400+ data points going back to 1967. The black line is the trend. The middle of the graph shows long-term returns are normally around +8% or +9% per year: nothing new there. What is most interesting though is that it shows periods of high confidence have normally led to weak returns. The converse is also true.

Back in Bubble Territory

There have only been 6 instances (yellow circles) when soft data provided by the Consumer Confidence Index was near its current level of 125.6. The median 10-year future return for those 6 instances was not much more than +1% annually.

Four of those 6 instances occurred after Alan Greenspan’s “irrational exuberance” comment regarding stock prices during the Tech Bubble. The remaining two instances occurred after Warren Buffett exited the stock market during the Nifty Fifty Bubble of the 1960s. Both bubbles, by definition, ended badly.

Soft Data a Proxy of Fear and Greed

All the times before this past March when the Consumer Confidence Index exceeded 125 occurred during the late stages of the Nifty Fifty and Tech Bubbles. On average, 10-year future returns averaged -0.2% during these periods of very high consumer confidence. This may explain why Fink said, “Maybe you should be selling now.”

The soft data is also consistent the words of Oracle of Omaha, who once said during the height of the Global Financial Crisis:

“Be fearful when others are greedy, and greedy when others are fearful.” – Warren Buffett (October 16, 2008)

Whether or not you find soft data as a proxy of fear and greed in building your retirement nest egg, please consult with an investment fiduciary before making any investment decisions.

Meritocracy Capital Partners Inc. is a boutique investment management firm & portfolio manager that aligns itself with its clients. We build trust & accountability by providing a fee structure driven by performance and by having our money invested right alongside our clients’ money. As a result, we treat our clients’ money like our very own.

We work with high-performing professionals and entrepreneurs that seek a value-focused and performance-driven approach to how their wealth is managed. We can be reached at 778-807-8560 or on our Contact page.

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