The Relationship Between Consumer Sentiment and Stock Prices

Testable hypotheses about the relationship between stock prices and consumer confidence seem to appear in the business press whenever new consumer survey data is released. Headlines like “Rise in Consumer Sentiment Sends Share Prices Higher”1 and “Stocks Tumble, Spurred by Dive in Consumer Confidence”2 suggest that stock prices respond directly to measures of consumer confidence. Previous research into the matter, however, suggests that the headline writers have it backwards – that the direction of influence runs only one way, from stock prices to consumer confidence, and that any stock price response to new information about consumer confidence is ephemeral. This paper focuses on the short-run and long-run relationship between stock indices and measures of consumer sentiment, and it presents three key empirical results. First, cointegration test confirm that there is no long-run relationship between different stock indices and the University of Michigan’s measure of consumer confidence. Second, regarding the short-run relationship between stock indices and consumer confidence, Granger-causality tests indicate that stock prices affect consumer confidence, but consumer confidence does not affect stock prices. Third, while unexpected changes in consumer confidence have no statistically significan