Consumer Sentiment's Role in Long-Term Buying Opportunities

Consumer Sentiment is just one tool for investors to use when choosing whether to buy, sell, add, or trim stocks. But it can be a very useful tool, especially when markets are heavily skewed in one direction as they appear to be today.

There have only been four (the three breaches during the 08 crisis I count as one) occurrences in the past when the U.S. consumer sentiment has dipped below the 57.40 mark. As we are currently quickly approaching 57.40 I have taken the liberty to map out the five-year returns of each of the four previous lows in consumer sentiment (assuming a buy-in during the month of the 57.40 breaches).

11/1974: 43.6% five-year return

04/1980: 76.02% five-year return

06/2008: 16.31% five-year return
11/2008: 81.33% five-year return
02/2009: 116.35% five year return

08/2011: 58.77% five-year return

Average nominal five-year return on the S&P500 since 1957: roughly 53%

Importance of these data? The takeaway here is that historically low consumer sentiment (sub 57.40) has in the past provided great opportunities for patient investors to enter long-term positions in stocks and yield abnormally high returns. Basing an investment decision on one economic metric is not an intelligent strategy, but using consumer sentiment to help time your buying position appears to be an effective method going off of historic price action.