Executive Edge

Consumer sentiment is at a 15-year high. That's a bad sign for stocks

Strong consumer sentiment a bad sign for this sector
Key Points
  • The Consumer Sentiment Index has topped 100 only three times in the past 15 years.
  • The University of Michigan economic indicator hit 102.4 in May, but that consumer confidence has not resulted in short-term stock market gains in recent trading history.

Consumers in the U.S. seem to be bullish on the health of the economy.

The University of Michigan's preliminary print on its Consumer Sentiment Index rose to 102.4 in May, the highest level in 15 years. That was well ahead of economist expectations of 97.5.

A level of more than 100 is rare — over the past decade the economic indicator has hit triple digits only on three other occasions.

It is a signal that consumers are viewing prospects for the overall economy much more favorably.

The reading was taken before tensions flared in the U.S.-China trade war. "To be sure, negative references to tariffs rose in the past week and are likely to rise further in late May and June," Richard Curtin, chief economist for the Surveys of Consumers, recently told CNBC.

However, even without the trade war complications for investors, a peak in consumer sentiment is a surprisingly bad sign for stocks, at least in the short term.

The two weeks after readings above 100 in the Consumer Sentiment Index, the stock market doesn't perform well, according to a CNBC analysis of Kensho data, a machine learning tool used by Wall Street banks and hedge funds to mine data insights from market history.

The worst-performing sector has been the historically defensive Consumer Staples Index, which drops an average of 2.4%.

It traded negatively in all three occurrences, underperforming the broader market.

Stocks don't perform well two weeks after consumer sentiment tops 100