September 2018 - Bubbles and Bottoms for Consumers -

Last month i`ve shown that consumer confidence is reaching levels that were last seen during the dot-com bubble. As you can see below, the consumer comfort index, which measures American citizen`s perception of the state of the economy, personal finances and whether it`s a good time to buy needed goods or services, has increased to dot-com levels as well.
An interesting development is the fact that the difference between the male and female consumer comfort levels have grown to all-time highs. The last time such a large disparity occurred, the great recession was right around the corner. Is this time different?

This consumer comfort is also boosted by an all-time record number of consecutive positive months in Non-Farm Payrolls. It`s practically double the previous record set in the late 80`s.

When consumer confidence reaches high levels, it is traditionally a bad time to invest in stocks. Consumer confidence always leads to a rise in household equity holdings as a percentage of total financial assets. In the first quarter of 2000 for example, 38.6% of household financial assets were invested in equities. Currently that level is at its second highest, at 34.3%.

It`s quite amazing to think that 34.3% of household assets are now invested in equities, since we also have an all-time high in the “hours of work needed to buy the S&P 500 composite”. This chart shows that it now costs more than 119 hours of work at the average hourly earnings of 22.24 dollars to be able to purchase the S&P 500 composite index. To put this in perspective: from the mid 70`s until the mid-80`s it only took about 20 hours of work to be able to purchase the index.

This excessive optimism, combined with a high percentage of equity holdings by households (Remember that household equity holdings are considered “dumb money”), leads to a good indicator that one should stand on the sidelines and let the stock market go through a decline. Or, if you`re more adventurous, it`s a good indicator to short the U.S. stock indexes.

The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.
- Bertrand Russell -

The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.