With consumer confidence measures released a couple of weeks ago, we have observed an interesting divergence between the University of Michigan consumer sentiment index and Conference Board consumer confidence index (top-left chart). When we plot the spread and observe the turning points, the spread bottoms out just before a recession occurs. We can look at how each measure is built to understand why: the Michigan surveys focus much more on the individual’s situation while the Conference Board surveys look more broadly at sentiment towards the economy. Naturally the Michigan scores tend to wane quicker at cyclical peaks.

The decline in the Conference Board confidence numbers points to future stress in the momentum factor – the bottom-left chart shows that momentum returns have the highest correlation with lagged changes in consumer confidence. This is not particularly surprising as the momentum factor is backed by confidence in the sense that it requires investors to believe that past winners will continue to deliver outperformance. As the Conference Board confidence numbers continue to roll over, we expect momentum to start to underperform value (last-chart).

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Source: Bloomberg, Macrobond, Variant Perception