The MSM is the level of consumer confidence, as measured by the University of Michigan Consumer Sentiment Index, divided the unemployment rate. And right now, the MSM index is pretty high – and it has been for a while. (You can see the charts and read the article here) Good news, right?
Not exactly. Jim Paulsen, Leuthold’s chief investment strategist, notes that when the MSM index is high, investors tend to be frisky – more motivated by greed than fear. More troubling, though, is that with low unemployment, other troubles start to emerge. Typically, low unemployment is a precursor to inflation and higher interest rates.
The MSM’s highest points since 1960 have been 1968, 2000 and now. While this doesn’t mean that the stock market is going to collapse tomorrow – or even over the next few years, it does mean that the outlook for the next five years or so isn’t terribly good.
A high MSM does indicate that it might be a good time to add inflation-sensitive investments, such as real estate and commodities, to your portfolio. Typical late-cycle stock sectors, such as energy, materials and industrials, might fare well also.
Mr. Paulsen cautions that the MSM is not a good short-term market predictor, something it shares with that other MSM. But for those with the long term in mind, it’s an indicator worth following.