So, how does one best measure social mood?
For the U.S. as a whole, economists and many investors tend to look at one or more of the three major consumer mood indices: the Conference Board’s Consumer Confidence Index®, the Thompson Reuters/University of Michigan Index of Consumer Sentiment®, and the Bloomberg Consumer Comfort Index®. Each has its own methodology and subcategories, but if you were to plot one on top of the other, you would see that they form very similar patterns over time. Unfortunately, as they all involve a survey process, they are often a lagging indicator. Of the three, I find the Bloomberg index most useful because it is published weekly, rather than monthly. Still, it too is lagged, as it reflects a four-week rolling average.
Bob Prechter offers that an even better measure of mood than the three major confidence indices, however, is the market itself. With a few minor caveats that I come back to in Chapter 8, “Social Mood and the Markets Today: So Where Are We?,” I agree that the broad market indices (the S&P 500 and the Dow Jones Industrial Average) are the best real-time social mood barometer out there. They rise as our mood improves and fall as our mood deteriorates. Markets are moved by changes in our mood.
I realize for many this runs counter to the cause and effect concept suggested by others that rising markets lift our mood whereas falling markets result in a drop in our mood. As you’ll see in Chapter 2, the ways in which changes in mood affect our preferences and our decision-making processes I believe make it clear that markets are moved by changes in our mood and not the other way around.