Source: University of Michigan, University of Michigan: Consumer Sentiment [UMCSENT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UMCSENT, 1/1/1978 to 6/30/2022 monthly. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.
It’s one of Warren Buffett’s best-known sayings: “Be fearful when others are greedy and greedy when others are fearful”. While contrarians know this on the whole to be sage advice, there is one indicator of fear that has been particularly useful for gauging potential opportunities for small stocks in general and small value specifically in recent history. And that indicator is a plunge in consumer sentiment
Heartland Advisors recently examined the historic relationship between stock market performance and the mood of U.S. consumers. We looked at past periods when the University of Michigan’s Consumer Sentiment Index fell sharply and dropped to a level of 65 or lower, which has coincided recently with heightened episodes of economic anxiety such as the global financial crisis, the 1990 recession, and the stagflationary era of the early 1980s. What we found is that over the rolling three-year period after the sentiment levels sank to such historic lows, the Russell 2000 Index performed surprisingly well. In fact, small stocks in the Index generated an average return of 24.7% for the annualized returns during each period, representing a 5-percentage-point advantage over the S&P 500 Index (large cap). Small value did even better, returning an average of 26.2% over the rolling three-year period, a 6.5-percentage-point advantage over large cap stocks.