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Does Consumer Sentiment Predict Stock Prices?

Sentiment doesn't forecast stock prices. It coincides with them. It is driven by them.

Weeks ago, William Blair published a brief note, striking a contrarian theme, warned that if things seem too good to be true, they probably are. It has now been nearly a decade since anything resembling a global bear market, a situation that has comforted investors into believing that securities carry only "minor risks." Compliant government policies, such as ultralow interest rates, enhance the mirage.

Six months ago, I penned my own forewarning, "Is the Contrarian Bell Clanging for Stocks?" As with Singer, my contrarian sensibilities were offended by investor sentiment--specifically, the so-called "Trump Bump." Prior to the election, stocks gained when Hillary Clinton's fortunes rose; investors, it appeared, favored the status quo. After the election, stocks advanced again, because (we were told) investors favored change. Heads stocks win, tails stocks win. That felt like euphoria to me.

So much for my intuition--stocks have since soared, with scarcely a look backward. Well, nobody takes my stock market musings too much to heart. Probably not Singer's opinions, either, even though he is paid to make asset-allocation decisions. Even the gullible realize that predicting the stock market's direction for the next few months is a task that exceeds the grasp of mortals.

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About Author

John Rekenthaler, CFA  John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

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