Consumers have not been this confident since October 2000. Hooray?

The Conference Board says Consumer Confidence is at 18-Year High.

The Conference Board Consumer Confidence Index® increased in August, following a modest increase in July. The Index now stands at 133.4 (1985=100), up from 127.9 in July. The Present Situation Index improved from 166.1 to 172.2, while the Expectations Index increased from 102.4 last month to 107.6 this month.

“Consumer confidence increased to its highest level since October 2000 (Index, 135.8), following a modest improvement in July,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current business and labor market conditions improved further. Expectations, which had declined in June and July, bounced back in August and continue to suggest solid economic growth for the remainder of 2018. Overall, these historically high confidence levels should continue to support healthy consumer spending in the near-term.”

Hooray?

Not so fast.

Before you jump up and down with high-fives about confidence please note that confidence is a lagging indicator.

Eternal Sunshine of the Spotless Mind

John Hussman discusses confidence in his latest post: Eternal Sunshine of the Spotless Mind.

Last week, consumer confidence pressed to a fresh cyclical high. As Tavi Costa at Crescat Capital observed, similar extremes in consumer confidence have regularly preceded substantial market losses.

Consumer confidence provides a striking illustration of how temporary psychological factors interact with the long-term and full-cycle effects of market valuation. Despite my error in believing that historically well-defined limits to speculation would survive the Federal Reserve’s deranged experiment with quantitative easing and zero interest rates, I’ve argued for decades that valuations drive long-term and full-cycle market outcomes, while shorter term psychology controls outcomes over shorter segments of the market cycle.

Over the past 12 years, as stocks have moved to bubble valuations, the S&P 500 has gained about 4.7% annually in excess of what one would have expected it to gain on the basis of 2006 valuations. That outcome has emerged hand-in-hand with the current, temporary exuberance in sentiment. There’s most likely a feedback here – the strong performance of the market may help to boost consumer confidence, and strong consumer confidence may help to support the market. The feedback may be self-reinforcing over short periods, but mean-reversion clearly dominates over the economic cycle, as investors fluctuate between extremes of optimism and extremes of pessimism.