LP L FINANCIAL R E S E AR C H
Weekly Market Commentary
v4
Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial
Highlights
According to last week’s widely-watched
University of Michigan survey of consumer
sentiment, consumer confidence fell to the
lowest level in 28 years.
Consumer confidence has consistently been a
contrarian indicator for the stock market – the
worse consumers feel, the better the gains over
the coming year. When consumers are very
pessimistic with sentiment below 60, as it is
today, over the following 12 months the S&P 500
has posted a 23% gain, on average.
In the past, there has been a high penalty to be
paid for waiting until confidence improves. During
every recession over the past 50 years, stocks
are typically up 25% before economic growth
stops slowing, 24% before home prices stop
going down, and 30% before the job situation
improves – so it is no surprise that stocks tend
to rally well before consumer confidence begins
to improve.
The way to play the confidence game is to buy
when others are overly pessimistic (and sell
when they are overly optimistic).
June 16, 2008
The Confidence Game
According to last week’s widely-watched University of Michigan survey of
consumer sentiment, consumer confidence fell to the lowest level in 28
years. Yet, in conflict with this reading on what consumers are saying, what
consumers actually did last month was reflected in last week’s strong retail
sales report for the month of May. Consumers may not have felt good about
it, but they spent a lot across all major categories, including: clothing, autos,
sporting goods, and electronics. While this pace of spending was likely
supported in part by the tax rebate checks sent out in May, this was the third
month in a row of solid gains in consumer spending, suggesting more is at
work than the rebate checks. This apparent contradiction begs the question:
is very pessimistic consumer sentiment likely to lead to a weaker economy
and stock market, or is it a sign that the worst is over?
Historical evidence shows that the trend in consumer confidence has lagged
the slowdown in economic growth – usually falling sharply only after the
worst of the economic slowdown is over and economic activity is poised to
rebound. More importantly, consumer confidence has consistently been
a contrarian indicator for the stock market – the worse consumers feel,
the better the gains over the coming year. Since the 1978, the lower the
level of consumer sentiment, the stronger the stock market gains over the
coming year, and likewise, the more optimistic consumers are, the weaker
the subsequent stock market performance. When consumers are very
pessimistic with sentiment below 60, as it is today, over the following 12
months the S&P 500 has posted a 23% gain, on average.
THE WORSE THEY FEEL, THE BETTER THE GAINS
Consumer Sentiment Survey and Next Twelve Months Price Change for S&P 500
Consumer Sentiment S&P 500 Price Gain over Next Twelve Months
Less than 60 +23.1%
Less than 70 +18.5%
Less than 80 +13.1%
87 (average) +10.8%
Greater than 90 +10.8%
Greater than 100 +8.1%
Greater than 110 -1.2%
LPL Financial Research, University of Michigan, Bloomberg
Past performance is not a guarantee of future results.
The chart of the historical relationship between consumer sentiment and
the S&P 500 suggests, in our opinion, an S&P 500 price gain of about 40%
over the next twelve months.
Consumer confidence is among the lagging indicators of the direction of the
markets. [chart 1] Many investors often wait until they feel more confident
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 W E E KLY MARKE T CO MME N TAR Y

1 Weak Consumer Confidence Points to Powerful to invest in stocks and look to indicators such as the return of economic
Gains over the Next Year growth, a trough in home prices, or a peak in the unemployment rate. In
Consumer Sentiment Survey and Next Twelve Months Price the past, there has been a high penalty to be paid for waiting until these
Change for S&P 500
indicators turn around and confidence in a recovery rises. As you can see
Consumer Confidence (left scale inverted)
S&P 500 Price Change Over Next Twelve Months (right scale)
from the table, which includes every recession over the past 50 years,
20 100% stocks are typically up 25% before economic growth stops slowing, 24%
40 75% before home prices stop going down, and 30% before the job situation
50% improves. It is no surprise then that stocks tend to rally well before
60
25% consumer confidence begins to improve.
80
0% PERFORMANCE OF S&P 500 FROM LOW POINT OF EVERY RECESSION OF PAST 50 YEARS
100
-25%
Recession Low Peak in Unemployment
120 -50%
Point for S&P 500 End of Recession Trough in Home Prices Rate
140 -75% Months % Months % Months %
1978 1982 1986 1990 1994 1998 2002 2006
10/22/57 6 11.4% n/a 9 21.1%
Source: LPL Financial Research, University of Michigan, Bloomberg
10/25/60 4 21.3% n/a 7 27.3%
5/26/70 6 25.9% 2 12.6% 6 32.9%
10/3/74 6 33.9% 21 67.4% 8 46.4%
3/27/80 4 24.5% 2 13.3% 4 23.9%
8/12/82 4 35.3% 2 17.6% 4 37.3%
10/11/90 6 29.1% 2 9.7% 20 46.1%
9/21/01 1 18.3% n/a 21 3.9%
Average 25.0% 24.1% 29.9%
Source: LPL Financial Research, Bloomberg
Past performance is not a guarantee of future results.

The way to play the confidence game is to buy when others are overly pessi-
mistic (and sell when they are overly optimistic). We continue to believe that
stocks will remain range-bound but volatile until the fourth quarter, when the
uncertainty surrounding the four “E” factors – election, energy, economy, and
earnings – begins to fade and stocks experience a classic fourth quarter rally.

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This report has been prepared by LPL Financial from sources believed to be reliable but no guarantee can be
made as to its accuracy or completeness. The opinions expressed herein are for general information only, are
subject to change without notice, and are not intended to provide specific advice or recommendations for any
individuals. Please contact your advisor with any questions regarding this report.
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political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially
less liquidity.
Stock investing involves risk including loss of principal Past performance is not a guarantee of future results.
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part of the diversified portfolio of sophisticated investors.
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