The U.S. consumer has been worried for years...
It wasn't just 2022's brutal bear market. Between the pandemic and the high inflation of 2021, consumers hit the panic button long before stocks began falling.
The market decline occurred alongside a seemingly obvious looming recession. But that recession hasn't shown up yet... And now, the American consumer is finally getting optimistic again.
Consumers are the most bullish they've been since mid-2021. And as I'll explain, this recent sentiment breakout isn't just a good sign for the economy... It's a good sign for stocks, too.
It's important to remember that the market doesn't always boom in a healthy economy. Stocks can do poorly even if the economy is doing just fine. On the flip side, stocks often begin major bull runs during the depths of a recession.
Still, stocks need a strong economy to thrive over the long term. And that means an improvement in consumer sentiment is good news for future returns.
We can see this through the University of Michigan Consumer Sentiment Index. Researchers at the University of Michigan build this index by surveying at least 600 Americans each month.
This index has decades of history behind it. So it gives powerful insight into what the typical American thinks about the state of the U.S. economy.
Today, folks are finally waking up to the fact that the economy isn't as bad as many had thought. This index has been on the rise in recent months. And it recently broke out to a multiyear high. Take a look...
Consumer sentiment has been sour for a while. And given the pandemic, multidecade-high inflation, and a stock market rout, that's no surprise.
But as you can see in the chart, sentiment is finally reversing. This index recently hit its highest level since 2021. And the breakout we just saw is a powerful sign for stock returns going forward.
To see it, I looked at each new instance of consumer sentiment breaking out to current levels. That has only happened 10 other times in nearly half a century. And it has always led to continued stock gains. Check it out...
Stocks in general have led to fantastic returns since our data began in 1978. That was near the generational bottom in the early 1980s. And the S&P 500 Index has returned 9.2% a year since then.
But you can crush that return if you buy when consumer sentiment is on the rise. Similar setups led to 4.4% gains in three months, 5.9% gains in six months, and 12.6% gains in a year.
That solid outperformance is even more impressive when you consider the track record: Stocks were higher a year later 100% of the time.
Still, nothing is certain in the markets. This could be the first time stocks fall after consumer sentiment breaks out. But history shows betting against this kind of track record isn't wise.
Instead, we should look at this for what it is... The consumer is finally waking up to the strong state of the U.S. economy.
A lasting economic boom is a good sign for stocks. And that means we want to bet on higher stock prices right now.
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