Things look pretty darn good for the U.S. economy. Unemployment rates are low, inflation-adjusted borrowing costs are practically zero, and corporate profit margins sit at record highs.
U.S. consumers have taken notice. The recently released Conference Board reading for consumer confidence reached 133.4. We have not seen a data point like that since the year 2000.
Ironically enough, an exceptionally happy consumer is rarely beneficial for the investment markets. Take a look at the forward returns for the S&P 500 when consumer confidence readings are as high as they are right now. If history is any guide, the next five years could be mighty bleak for the hold-n-hope advocate.
Another way of looking at the consumer survey data is to evaluate the Conference Board’s subordinate indices — the Present Situation Index (current) and the Expectations Index (future). When consumers are more enthusiastic about the present than they are about the future, the difference between the two sub-indexes rises. Recessionary pressures can develop shortly thereafter.
Granted, an imminent recession does not seem likely. On the other hand, investors may be overestimating their ability to spot and to sidestep the next economic downturn.
Consider precursors of economic hardship in the past. For example, total household net-worth-to-GDP reached unusually high levels in 2000 before the dot-com bust and subsequent 2001 recession. Another record peak for the indicator occurred in 2007 on the back of real estate price euphoria. The financial crisis and subprime-inspired Great Recession followed in 2008.
Now we are looking at net-worth-to-GDP levels at even higher elevations. North of 500%. Perhaps this development should not be too surprising with stock and real estate prices near all-time records.
Then again, how long can household net-worth-to-GDP exist at levels far above the norms of 350%-400%? Do equity and housing extremes forewarn near-term economic weakness?
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