Is There A Pattern?
What really stands out in this month’s report is the difference between the two measures. Given that, I went back and graphed that difference (the Conference Board number minus the Michigan number) to see if historically there were any patterns.
There were, as you can see. Over the past 40 years, when the gap between the two confidence measures hit high levels, economic and market trouble tended to follow a couple of years thereafter. Looking at the chart below, we could well be seeing more trouble ahead if confidence continues to decline, which would make economic sense.
Confidence Is Key
Beyond that, I am not sure what this difference means. This is, frankly, a preliminary analysis, sparked by this morning’s weak Conference Board number. I am not entirely sure what to make of this data yet. I will be digging more into the methodology of both series, to try to better understand the underlying relationship. While this certainly isn’t causative, it is potentially a good risk indicator and one that is independent of others.
What I do know is that confidence remains key, and the most recent numbers we are seeing raise real concerns. My outlook remains positive, but one of the key risks just reasserted itself.
Brad McMillan is the chief investment officer at Commonwealth Financial Network.