Consumer Confidence and Stock Returns

Consumer confidence predicts economic activity, but does it also predict stock returns? Do stock returns affect consumer confidence? And what is the relationship between consumer confidence and investor sentiment? Answers to these questions are gained through examination of the consumer confidence measures of the University of Michigan and the Conference Board. Consumer confidence rises with high stock returns, but high consumer confidence is followed by low stock returns. Sentiments of individual investors about the stock market improve with consumer confidence about the economy, as if individuals were unaware that stock prices are a leading indicator of the economy. No relationship is found between changes in the sentiments of institutional investors and consumer confidence, however.