I’ve written previously about Danny Blanchflower, a very prominent, skilled economist, who used to serve on the Bank of England’s monetary policy board, who has a very non-consensus bearish call that the US is presently on the cusp of a recession.
Below are the global consumer confidence stats, and, for the US section (bottom right of the graph below), I’ve got two measures, one the standard Conference Board consumer confidence measure (teal) which looks positive, depicting the strong post pandemic recovery, and the second (pink) being the University of Michigan consumer confidence measure, which has cratered.
The Umich survey is eyebrow raising, and Blanchflower leans heavily on it when suggesting falls of this magnitude have predictive power for the economy t+12 months ahead. Such a fall would suggest recession territory, something the market is assuredly not priced for.
Plotting the market relative to the indicator is interesting enough…
…but it is the scatterplot of annual changes that we need to focus on.
Like the above graph, it is striking enough, because it would suggest that the market is some 25% overvalued, if the macro market timing indicator of confidence is correct.
Scatterplots are great, but we can formalise the relationship econometrically. When we do so, we note that the regression correlation coefficients are significant and positive.
But, (you knew that was coming) there is a raging amount of autocorrelation in the data, that we need to account for. The autocorrelation just means that there is information (a pattern) in the error terms that we’ve “left out” of our model.
Simple lags are sufficient to fix the problem, and whilst our correlation coefficients remain statistically significant, and positive, after we control for the autocorrelation, they plunge in their explanatory power, dropping to less than 18% as an explanation of the variance of the data.
That’s not enough to do DAA market timing, in and of itself, which is why we use a whole host of other stuff.
Still, Danny is wise, and his point, unlike mine, isn’t about the market, but rather about the economy, and we will watch how this unfolds with interest. It may be that the UMich survey is broken in how it collects the data, since it doesn’t match the vast array of other indicators we follow (all of which suggest the US economy is booming, noting of course that doesn’t answer whether or not it is fairly valued).
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