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OpinionColumnistsLane Filler

It’s always bright before the crash

Specialist Peter Mazza and trader Michael Urkonis work

Specialist Peter Mazza and trader Michael Urkonis work on the floor of the New York Stock Exchange on Tuesday. Credit: AP / Richard Drew

Last month, the U.S Consumer Confidence Index hit 138.4, a near all-time high. It sounds like an occasion for breaking out the Champagne and caviar, or at least the Cheez Whiz and name-brand box wine, right? Well, probably not. Unfortunately, data on consumer confidence this good are almost always bad.

The monthly survey is conducted by Nielsen for The Conference Board, an independent research association. Reacting to the result, Lynn Franco, that group’s director of economic indicators, said, “The September reading is not far from the all-time high of 144.7 reached in 2000. Consumers’ assessment of current conditions remains extremely favorable, bolstered by a strong economy and robust job growth.”

That sounds great until you consider what actually happened after consumer confidence hit that all-time high in 2000: The internet boom went kaboom, the Nasdaq lost 70 percent of its value in two years and the S&P 500 and Dow Jones Industrial Average plummeted more than 40 percent.

There was a recession. According to the Labor Department, 2.5 million jobs were lost. And the unemployment rate went from 4.2 percent in 2001 to 6.3 percent by June 2003.

And what are we seeing with the current reading so high? The major stock indexes have been stumbling, with the Nasdaq hitting correction territory early Tuesday, 10.7 percent below its Aug. 30 high. The Dow and S&P 500 also were down for a fifth straight day, and Bank of America said 14 of its 19 bear market “signposts” had been triggered.

The connection between high consumer confidence and crashes and recessions isn’t absolute, but it is very strong. When consumer confidence hits a peak, what follows are often bear markets and shrinking or stagnating economies. According to The Wall Street Journal, in the 12 months following monthly consumer confidence readings in the top 5 percent of all such readings, the S&P 500 lost an average of 3.7 percent. In the 12-month periods following monthly readings in the bottom 5 percent, the S&P 500 averaged gains of 15.5 percent.

Warren Buffett, probably the most succesful investor in the history of the world, often says we should be “fearful when others are greedy, and greedy when others are fearful.”

But why does high consumer confidence so often mean bad times ahead? Some experts suggest it’s because those high readings reflect what has been happening rather than what’s about to happen. If I am confident as a consumer because I’m a gravel salesman who’s been crushing it, I might take my past year’s success to mean things are going to keep going my way. But people don’t need an infinite amount of gravel or cars or homes or George Foreman grills, so great sales often indicate slowdowns ahead.

But the biggest reason bad news so regularly follows great moods is: When things are at the summit, where else could they go but downhill?

On the bright side, Buffett also would point out that stock prices plummeting is actually good news unless you are at or near retirement age. If you are buying stock in your 401(k) plan, you should want that stock to be as cheap as possible, just like anything else you buy.

This, though, is no consolation for seniors who see their savings decimated. And it stops being true for younger people if things get so bad that we lose our jobs and can’t buy any more stocks, or box wine.

Mostly, things are never as good as they seem in the high times, or as bad as they seem in the dark days. When in doubt, and experiencing extreme highs or lows, looking for them to end is often a great bet.

Lane Filler is a member of Newsday’s editorial board.